Example of Using the Actual Cost Method
This example illustrates how the cost processor uses the actual cost method to cost: inventory receipts, cost of goods sold, and the value of beginning and ending inventory.
Scenario
A restaurant business receives two shipments of raw material for a total of 25 units, and a sales order of 12 units. The unit is defined as a sandwich, and the raw material is defined as sandwich food ingredients.
Transaction Details
The business needs to calculate:
-
Overhead absorption on the two receipts.
-
The value of beginning and ending inventory, including raw materials and overhead absorption.
-
Cost of good sold.
Analysis
Following are the details for two receipts of raw materials:
Receipt ID |
Inventory Value |
---|---|
Receipt #1 |
10 * $10 = $100 |
Receipt #2 |
15 * $12 = $180 |
The cost processor calculates overhead absorption for the two receipts as follows:
Receipt ID |
Overhead Absorption |
---|---|
Receipt #1 |
Labor: $5 Facility: $3 |
Receipt #2 |
Labor: $8 Facility: $7 |
Resulting Accounting Distributions
The distribution processor generates the following accounting entries:
Event |
Accounting Entry |
---|---|
Receipt #1: 10 units raw material |
Dr Inventory-Raw Material $100 Cr Receiving $100 |
Receipt #1: overhead |
Dr Inventory-Labor $5 Dr Inventory-Facility $3 Cr Overhead Absorption $8 |
Receipt #2: 15 units raw material |
Dr Inventory-Raw Material $180 Cr Receiving $180 |
Receipt #2: overhead |
Dr Inventory-Labor $8 Dr Inventory-Facility $7 Dr Overhead Absorption $15 |
COGS for 12 units (10 * $108/10) + (2 * $195/15) |
Dr COGS $134 Cr Inventory $134 |
The beginning inventory is 25 units valued at: 10 * $10.8 + 15 * $13 = $303.
The ending inventory is 13 units valued at: 13 * $13 = $169.