6.

ENDING INVENTORY BUDGET

The dollar amount for the ending inventory of finished goods is needed below to determine cost of
goods sold. The dollar amounts for ending direct materials and finished goods are needed for the
balance sheet.
a. Ending Direct Materials = (Desired Ending Materials from 3b)(udgeted !rices)
b. udgeted or "tandard #nit $ost
= (%uantity of D.M. re&uired 'er #nit)(udgeted !rices)
( (D.). *ours re&uired 'er #nit)(udgeted +ate)
( (Total ,verhead +ate)(D.). *ours re&uired 'er #nit)
The budgeted or standard unit cost can be calculated at any time after the budgeted &uantities 'er unit
and in'ut 'rices are obtained. The calculation is 'laced here because it is needed for 6c.
c. Ending -inished .oods
= (Desired Ending -inished .oods from /)(udgeted #nit $ost)
0ou have already seen that inventory for a merchandising business consists of the goods available for
resale to customers. *owever1 retailers are not the only businesses that maintain inventory.
Manufacturers also have inventories related to the goods they 'roduce. .oods com'leted and awaiting
sale are termed 2finished goods2 inventory. 3 manufacturer may also have 2wor4 in 'rocess2 inventory
consisting of goods being manufactured but not yet com'leted. 3nd1 a third category of inventory is
2raw material12 consisting of goods to be used in the manufacture of 'roducts. 5nventories are ty'ically
classified as current assets on the balance sheet. 3 substantial 'ortion of the managerial accounting
deal with issues relating to accounting for costs of manufactured inventory. -or now1 we will focus on
general 'rinci'les of inventory accounting that are a''licable to most all enter'rises.
The ending finished goods inventory budget su''lies information needed for the balance sheet and
serves as in'ut for the 're'aration of the cost of goods sold budget.
5t 'rovides information for the unit cost of a finished 'roduct and the cost of the
e6'ected inventories.
.. The cost of goods sold budget 'rovides the information needed for the 'ro forma income
statement.
Ending Inventories Budget
udgeted inventory amounts at month end are needed for direct materials and finished goods inventory
for the cost of goods sold budget and the budgeted balance sheet. The com'utations for these amounts1
using a -5-, inventory method1 are shown in "chedule 7g (see Table /389 ). The ending inventory cost
de'ends in 'art on the beginning inventory cost for both direct materials and finished goods. The
o'ening inventory of direct materials1 :anuary 71 /;<<1 is 7197= units > ?@.A; = ?7B167/1 whereas the
o'ening inventory of finished goods is /17B; units > ?/;.77 = ?B31;3A.
Table . !"#$ %&hedule 'g$ Ending Inventories Budget( )irst *uarter( +,,
-hat it is$
Ending inventory is the boo4 value of inventory at the end of a financial or accounting re'orting
'eriod.
.o/ it /or0s1E2a34le$
Ending inventory e&uals the beginning inventory balance 'lus the cost of any inventory 'urchases
minus the cost of any inventory sold and shrin4age.
-or e6am'leC
"alesC ?7A1;;;1;;;
$ost of .oods "oldC
eginning 5nventoryC ?91;;;1;;;
!urchasesC ?731;;;1;;;
$ost of .oods 3vailable for "aleC ?/;1;;;1;;;
)essC Ending 5nventoryC ?@1;;;1;;;
$ost of .oods "oldC ?7/1;;;1;;;
.ross !rofit on "alesC ?31;;;1;;;
-or manufacturers1 ending inventory is com'rised of three account balances instead of Dust oneE
materials inventory1 wor4 in 'rocess inventory1 and finished goods inventory. Materials inventory
ending balance is e&ual to its beginning balance 'lus the cost of materials 'urchased less the cost of
materials used. For4 in 'rocess ending inventory balance is e&ual to its beginning balance 'lus total
manufacturing costs less the cost of goods manufactured. -inished goods inventory ending balance is
e&ual to its beginning balance 'lus the cost of goods manufactured less the cost of goods sold. These
three account balances combined com'rise the total ending inventory for manufacturers.
-hy it 5atters$
Many com'anies ta4e a 'hysical count of inventory at the end of a fiscal year to verify that the
inventory they actually have on hand re'resents what is listed on their automated systems. ,ften1
auditors re&uire this verification. 5f the tally comes out vastly different1 there may be an issue of
shrin4age or other issues. 5f the ending inventory balance is understated then1 corres'ondingly1 the net
income for the same 'eriod will also be understated.
5n addition1 since the later re'orting 'eriods start with the beginning balance from the 'revious
re'orting 'eriodGs ending balance1 it is crucial that the correct and accurate ending balance be re'orted
on the financial statement to ensure accuracy of future re'orts.
-or manufacturers1 this ending inventory number is crucial in determining if they stuc4 to their budget
and if there are 'roduction inefficiencies that should be investigated.
E2a34le of the Ending )inished Goods Inventory Budget
.eorgia $or'oration sells a single 'roduct1 and has derived its main cost com'onents in the 'roduct
budget1 direct materials budget1 and manufacturing overhead budget. 5ts ending finished goods
inventory cost calculation followsC
.eorgia $or'oration
Ending -inished .oods 5nventory udget
-or the 0ear Ended December 371 /;<<
%tr 7 %tr / %tr 3 %tr B
$ost 'er unitC
( Direct materials cost ?7/.A; ?7/.A; ?7/.9A ?7/.9A
( Direct labor cost B.;; B.A; B.A; B.A;
( Manufacturing ,H* cost 6.A; 6.A; 6.A; 6.9A
= Total cost 'er unit ?/3.;; ?/3.A; ?/3.9A ?/B.;;
Ending finished goods units @1;;; 7/1;;; 7;1;;; =1;;;
6 Total cost 'er unit ?/3.;; ?/3.A; ?/3.9A ?/B.;;
= Ending -H. inventory ?7@B1;;; ?/@/1;;; ?/391A;; ?/761;;;
.eorgia $or'oration is e6'ecting the cost of materials to increase in the third &uarter1 as well as to
boost its direct labor cost in the second &uarter as the result of a union agreement1 and to increase its
manufacturing overhead cost in the fourth &uarter because of a scheduled rent increase. 3ll of these
factors increase the cost of the 'roduct from ?/3.;; 'er unit at the end of the first &uarter to ?/B.;; at
the end of the fourth &uarter.