CHAPTER 6 Cost of Sales and Inventories

Presented by:

Jerome Caete Rosedel Rosas Nihayah Macakiling

Cost of Sales and Inventories

TYPES OF COMPANIES
MERCHANDISING COMPANY MANUFACTURING COMPANY SERVICE COMPANY

INVENTORY COSTING METHOD LOWER OF COST OR MARKET ANALYSIS OF INVENTORY PROBLEM 6-5 CASE 6-1

Types of Companies
MERCHANDISING COMPANY: retail stores, wholesalers, distributors and similar companies that sell tangible goods MANUFACTURING COMPANY: converts raw materials and purchased parts into finished goods ( it has three type inventory accounts; materials, work in process and finished goods)

Types of Companies
SERVICE COMPANY: furnish intangible services rather than tangible goods.
Accountants Attorneys Physicians and etc Supplies: tangible items that will be consumed in the course of normal operation. Examples include office and janitorial supplies, and lubricants and repair parts for equipments. Supplies are distinguished from merchandise in that they are not sold as such, and distinguished from materials in that supplies are not accounted for as element of the cost of goods manufactured.

Merchandising Company
Acquisition Cost
Merchandise is added to inventory at its cost, in accordance with the basic cost concept. Cost includes both the cost of acquiring the merchandise and also any expenditures made to make the goods ready for sale. The purchase cost also is adjusted for returns and allowances and for cash discounts given by the suppliers of the merchandise.

In accounting, purchase refers not the placing of a purchase order but rather the receipt of the merchandise that was ordered. No accounting entry is made when the merchandise is ordered. The entry is made only when the merchandise becomes the property of the buyer.

Merchandising Company
The Basic Measurement Problem
The amount of goods available for sale during the period is the sum of the beginning inventory plus the purchase during the period. The problem is how to divide the amount of goods available for sale between (1) the ending inventory and (2) cost of goods sold. How much of the $11,400 is still on hand at the end of the period, and how much was sold during the period? This is a significant problem because its resolution affects both the amount of inventory reported on the balance sheet and the amount of profit reported on the income statement for the period.
Available for sale $11,400 Cost of goods sold $? Beginning inventory $4,000

Illustration: Merchandise Inventory and Flows

Ending inventory Purchases $7,400 $?

Inventory reservoir

Merchandising Company
The Basic Measurement Problem
Two approaches to this problem
Periodic inventory method; we can determine the amount of ending inventory and deduce cost of goods sold by subtracting the ending inventory from the goods available for sale. Perpetual inventory method; we can measure amount actually delivered to customers and deduce the ending inventory by subtracting cost of goods sold from the goods available for sale.

Merchandising Company
Periodic Inventory Method
A physical count is made of merchandise in the ending inventory, and the cost of this inventory is determined. The process is called taking a physical inventory.
Beginning Inventory Plus: Purchases Equals: Goods available for sale Less: Ending Inventory Cost of goods sold $4,000 7,400 11,400 2,000* $9,400

*assume that the physical inventory shows the cost of the merchandise remaining at the end of the period

Merchandising Company

Periodic Inventory Method

Most companies do not show calculations in the cost of goods sold section of the published income statement itself. In contrast internal reports to management, the calculation with additional detail is often presented. Below is the internal income statement
Beginning Inventory Plus: Purchases, gross Freight in
Less purchase Net Purchases Equals: Goods available for sale Less: Ending Inventory Cost of goods sold

$4,000
$7,000 600 7,600 200 7,400 11,400 2,000* $ 9,400

Merchandising Company
Periodic Inventory Method
Ending Inventory determined by physical count Does not keep a running record of all goods bought and sold or Systems do not keep a continuous record of inventory on hand Inventory counted at least once a year Used for inexpensive goods

Merchandising Company
Perpetual Inventory Method
A record is maintained of each item carried in the inventory. In a manual system, this record is a card similar to the sample shown
Item: Cassette deck, Model S150
Date Jan 2 12 14 25 70 100 7,000 56 100 5,600 32 100 3,200 Units Receipts Units Cost Total Units Shipments Units Cost Total Units 40 8 78 22 Balance Units Cost Total 100 100 100 100 4,000 800 7,800 2,200

27

100

200*

20

100

2,000

*This entry is a purchase return to the manufacturer

Merchandising Company
Perpetual Inventory Method
Assuming for simplicity that a company had only the item shown in the above illustration, the journal entries for the transactions listed there would be
For purchases:
Merchandise inventory Accounts payable 7,000
7,000 8,800 8,800 200 200

For shipments to customers:

Cost of goods sold Merchandise inventory

For purchases returns:

Accounts payable Merchandise inventory

Merchandising Company
Perpetual Inventory Method

Purchases increase Merchandise Inventory. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.

Merchandising Company
Comparison of Periodic and Perpetual Methods
Both inventory methods match the cost of goods sold with the sales revenue for those same goods. Thus, either method is in accord with the matching concept. Without this matching, the gross margin amount for a period would not be meaningful.

Merchandising Company
Comparison of Periodic and Perpetual Methods
Three important advantages of perpetual method over periodic method.
One, the detailed record maintained for each item is useful in deciding when and how much to reorder and in analyzing customer demand for the item. Two, the perpetual inventory record has a built-in check that is not possible with periodic method Three, an income statement can be prepared without taking a physical inventory. Thus an income statement can be prepared every month, with accuracy of underlying perpetual inventory records being checked by an annual or semi annual physical inventory.

Merchandising Company
Retail Method
A store that does not maintain perpetual inventory records can nevertheless prepare reasonably accurate monthly income statement without taking a physical inventory by using the retail method. In this method, purchases are recorded at both their cost and selling price. The gross margin percentage of the goods available for sale is calculated from these records. The complement of this percentage is applied to sales for the month (obtained from sales register records) to find the approximate cost of goods sold.

Beginning inventory Purchases Goods available for sale

At Cost $4,000 7,000 $11,000

At Retail $6,000 10,000 $16,000

Gross margin percentage is ($16,000 - $11,000)/ $16,000= 31% The complement is 100%- 31%= 69% So, if the sales for the month were $13,000, it is assumed that the cost of goods sold was 69% of this amount, or $8,970.

Manufacturing Companies

A manufacturing company has as a major function the conversion of raw materials and purchased parts into finished goods.

Manufacturing Companies
Three types of inventory accounts:

1.Materials inventory:
Items of material that are to become a part of the ultimately salable goods that result from the manufacturing process.

Manufacturing Companies 2. Work in Process Inventory:

Goods that have started through the manufacturing process but have not yet been finished.

Manufacturing Companies 3. Finished goods inventory:

Goods that have been manufactured but have not yet been shipped to customers.

Manufacturing Companies
Manufacturing Inventories and Flows
Ending
Purchases Materials used
Beginning

Ending Completed goods

Beginning

Materials inventory Plus Conversion costs

Ending Cost of goods sold

Beginning

Work in process inventory

Finished goods inventory

Manufacturing Companies
Materials Inventory
Balance, Jan. 1 (1) Purchases 154 273 264

Materials used: 154 + 273 163 = 264

Balance, Jan. 31 Balance, Jan. 1 Materials used (3) Conversion costs Balance, Jan. 31 Balance, Jan. 1 Goods manufactured Balance, Jan. 31 163 19 264 330 43 69 570 66 (2) 570 Cost of goods manufactured: 19 +264 +330 43 = 570 (4) 573 Cost of goods sold: 69 + 570 66 = 573 (5)

Work in Process Inventory

Finished Goods Inventory

Cost of Goods Sold 573 573 Income Summary (6)

Manufacturing Companies
(1) Materials Inventory Purchases Freight-in (2) Work in Process Inventory Materials Inventory (3) Work in Process Inventory 330,000 Direct Labor 151,000 Indirect Labor 24,000 Factory Heat, Light, and Power 90,000 Factory Supplies Used 22,000 Factory Insurance and Taxes 8,000 Depreciation, Plant and Equipment 35,000 264,000 264,000 273,000

266,000 7,000

Manufacturing Companies
(4) Finished Goods Inventory Work in Process Inventory (5) Cost of Goods Sold Finished Goods Inventory 573,000 573,000 570,000 570,000

(6) Income Summary Cost of Goods Sold 573,000 573,000

Manufacturing Companies
Product costing system
A perpetual method in a manufacturing company. In such a system, the cost of each product is accumulated as it flows through the production process.

Service Companies
Product costing in service firms is the same as in manufacturing firms. Three types of Service Organizations: 1. Personal services organizations such as barber shops, beauty parlors, and medical and dental practices have no inventories other than supplies inventory. 2. Building Trade Firms and Repair Businesses the inventories of repair parts and building materials carried by these firms are analogous to materials inventories in a manufacturing firm. 3. Professional Service such as law and accounting firms, have labor product costs but no materials costs.

Accounts Receivable Billings (or Revenues)

Project Expenses Jobs in Progress

10,000
10,000 4,000 4,000

Inventory Costing Methods

1. Specific identification method
- this method can be unsatisfactory because cost of goods sold depends on what specific item happen to be sold. Indeed, a merchant can deliberately manipulate the cost of goods sold by selecting items that have relatively high or relatively low cost.

Inventory Costing Methods

2. Average Cost method
- the average cost of the goods available for sale is computed and the units in both cost of goods sold and ending inventory are costed at this average cost. Average cost representative of the cost of all items that were available for sale during the period.

Inventory Costing Methods

3. First-In, First-Out Method (FIFO method) - Assumes that the oldest goods are sold first and that the most recently purchased goods are in the ending inventory. cost of goods sold is likely to approximate the physical flow of the goods. The ending inventory approximates the current cost of the goods, since it is costed at the amounts of most recent purchases.

Inventory Costing Methods

4. Last-In, First-Out Method (LIFO method) - Cost of goods sold is based on the cost of the most recent purchases, and ending inventory is costed at the cost of the oldest units available.
Cost of goods sold does not reflect the usual physical flow of merchandise. The ending inventory may be costed at amounts prevailing several years ago, which in era of rapid inflation are far below current costs.

Inventory Costing Methods

LIFO Dollar Value Method
- it is applied to an inventory of physically unlike items. In this method, items whose prices tend to move together are grouped into an inventory pool. - it saves a considerable amount of recordkeeping effort.

LIFO Reserve the mathematical difference

between two inventory amounts, one based on a LIFO and the other based on a different method of valuing inventory.

Lower of Cost or Market

The general inventory valuation principle, deriving from the conservatism concept, is that inventory is reported on the balance sheet at the lower of its cost or its market value. In ordinary situation, inventory is reported at its cost. It is reduced below cost only when there is evidence that the value of the items, when eventually sold or disposed of, will be less than their cost.

Accounting Research Board No. 43 states that this estimate should be the current replacement cost of the item. 1. It should not be higher than the estimated selling price of the item less the costs associated with selling it. This amount is called the net realizable value. 2. it should not be lower than the net realizable value less a normal profit

Analysis of Inventory
INVENTORY TURNOVER
The ratio commonly used in analyzing the size of the inventory item. Inventory turnover = Cost of goods sold Inventory Inventory turnover = $ 1,000,000 $ 250,000 Inventory turnover = 4.0 times*
*This is equivalent to saying that the ending inventory turns over once every three months (quarter of a year)

Analysis of Inventory
Days Inventory
The same relationship can be expressed as the number of days inventory on hand. Days inventory = Inventory Cost of goods sold / 365 Days inventoy = $250,000 $1,000,000 / 365 Days inventory = 91 days
If one has calculated inventory turnover then Days inventory= 365/ inventory turnover

Analysis of Inventory
GROSS MARGIN PERCENTAGE
A ratio closely associated with inventory accounting is a companys gross margin (sales less cost of goods sold) expressed as a percentage of its net sales revenue.

Summary
The objectives of inventory accounting are; To match the cost of goods sold, an expense, with the revenue earned from the sale of those goods in an accounting period To measure the cost of inventory on hand at the end of the period, which is an asset. Merchandising company has one inventory account. Manufacturing company has three inventory accounts: Materials, Work in Progress and Finished goods Inventory is ordinary measured at its cost. Merchandising company- cost is essentially the amount expended to acquire the goods Manufacturing company- product cost include, in addition to materials cost, the labor cost and other production cost incurred in converting materials into finished goods. Flow of cost can be measured by any several methods; Specific identification Average cost FIFO LIFO If the market value of an inventory item is below cost, the item is reported at its market value. Two ratios helpful in analyzing inventories are inventory turnover and days inventory The inventory accounting method adopted by the management can influence a companys gross margin percentage

Problem 6-5
Electronic Heaven, Inc., sells electronic merchandise, including a personal computer offered for the first time in September, which retails for $695. sales of this personal computer for the next six-month period (ending February 28) totaled $52,125. purchase records indicate the following on the amounts purchased and prices paid by Electronic Heaven.
Purchase Date September 10 October 15 November 2 December 10 February 3 Units 12 20 32 11 10 Cost per unit $370 375 360 350 335

Problem 6-5
Required a. Prepare a statement for this personal computer showing the gross margin for the six-month period ending February 28 using the FIFO, average cost and LIFO methods. b. What was the gross margin percentage earned on the $52,125 sales of this personal computer? c. If all the purchases and sales of this personal computer were for cash, what was the net pretax cash flow resulting from the purchases and sales of this personal computer? Would the use of different inventory methods change the pre-tax cash flow figure you calculated? d. Assume a tax rate of 30 percent. What would be the net after-tax cash flow using different inventory methods for tax purposes?

Solution
a.1 FIFO method
Purchase Date Units Cost per unit

September 10
October 15 November 2 December 10 February 3 Sales Cost of goods sold: From beginning inventory From purchase of Oct. 15 From purchase of Nov. 2 From purchase of Dec. 10 Cost of goods sold Gross margin

12
20 32 11 10

$370
375 360 350 335 $52,125

(12 x 370) (20 x 375) (32 x 360) (11 x 350)

4,440 7,500 11, 520 3,850 ($27,310) $24,815

Solution
a.2 Average cost method
Purchase Date September 10 October 15 November 2 December 10 February 3 Units 12 20 32 11 10 Cost per unit $370 375 360 350 335 Total cost 4440 7500 11520 3850 3350

Goods available for sale

85

30660

Average cost = 30660 85 = 360.71 $52,125 695 =75 units of personal computer
Sales Cost of goods sold Gross Margin (75 x 360.71) $52,125.00 ($27,053.25) $25,071.75

Solution
a.3 LIFO method
Purchase Date Units Cost per unit

September 10
October 15 November 2 December 10 February 3

12
20 32 11 10

$370
375 360 350 335

Sales Cost of goods sold: From purchase of Feb. 3 From purchase of Dec. 10 From purchase of Nov. 2 From purchase of Oct. 15 From purchase of Sept. 10 Cost of goods sold Gross margin

$52,125 (10 x 335) (11 x 350) (32 x 360) (20 x 375) (2 x 370) 3,350 3,850 11,520 7,500 740 ($26,960) $25,165

Solution
Average cost FIFO method LIFO method method Sales Cost of goods sold
Gross margin Gross margin percentage

b. The gross margin percentage earned on the $52,125 sales of this personal computer.

$52,125 ($27,053.25)
$25,071.75 48.10%

$52,125 ($27,310)
$24,815 47.61%

$52,125 ($26,960)
$25,165 48.28%

Solution
c. Using different inventory costing methods results to different net pre-tax cash flow.

Sales Cost of goods sold Gross margin Less: Operating expenses Net pre-tax

Average cost method $52,125 ($27,053.25)

$25,071.75 0 $25,071.75

FIFO method $52,125 ($27,310)

$24,815 0 $24,815

LIFO method $52,125 ($26,960)

$25,165 0 $25,165

Solution
d. The nt after-tax cash flow using different inventory methods Average cost method Sales Cost of goods sold $52,125 ($27,053.25) FIFO method LIFO method

$52,125 ($27,310)

$52,125 ($26,960)

Gross margin Less: Operating expenses Net pre-tax Tax expense (30%)

$25,071.75 0 $25,071.75 ($7,521.525)

$24,815 0 $24,815 ($7,444.50)

$25,165 0 $25,165 ($7,549.50)

Net after tax

$17,550.225

$17,370.50

$17,615.50

Case 6-1

Browning Manufacturing Company

T-Accounts

Cash + $ 118,440 264,000 2,604,000

$

Accounts Receivables 144,000 78,000 492,000 198,000 49,200 135,600 522,000 38,400 788,400 9,000 36,000 52,200
2,542,800 $ + 311,760 2,562,000 $ 19,200 49,200 2,604,000 2,672,400

$ 2,873,760 $ 201,360

Materials $ 110,520 825,000 $ 935,520 $ 124,520 $ 811,000 $ 811,000

$ 2,986,440 $ 443,640

Case 6-1
Supplies $ $ $ 17,280 66,000 83,280 22,080

Browning Manufacturing Company

Finished Goods Inventory $ $ 61,200 61,200 + $ 257,040 1,901,952 $ 2,158,992 $ 352,368 $ 1,806,624 $ 1,806,624

Work in Process Inventory

+ -

Cost of Goods Sold + $ 1,806,624 $ 1,806,624

172,200 811,000 *1,129,200

210,448

$ 1,901,952

$ 2,112,400 $

$ 1,901,952
$492,000 198,000 49,200 135,600 61,200 52,800 140,400 $1,129,200

Prepaid Taxes & Insurance, factory

+ -

*Direct Manufacturing Labor Indirect Manufactring Labor Social Security Taxes Power, Heat, and Light Supplies Used in Manufacturing Expiration off repaid Taxes and Insurance Dep. Of Mfg. Building and Equipment

66,720 78,000 91,920

52,800

$ 144,720
$

52,800

Case 6-1

Browning Manufacturing Company

Sales Returns & Allowances $ $ + 19,200 19,200 + 788,400 185,760 825,000 66,000 288,360 288,840 264,000 552,840 -

Manufacturing Plant & Equipment

$ 2,678,400 144,000
$ 2,822,400

Accounts Payable Sales + $ 2,562,000 $ 2,562,000 $ Sales Discounts 788,400 $ $ $

$ 1,076,760

+ $ 49,200
$ 49,200

Notes Payable $ $

Case 6-1

Browning Manufacturing Company

Selling and Admin Expense + $ 522,000 -

Interest Expense

$
$

+ 38,400 38,400

$ 522,000
Indirect Manufacturing Labor Income Taxes Payable +

$ 9,000 5,800
14,800

+ 198,000

$
$

9,000
9,000

$
$

198,000

Direct Manufacturing Labor + $ 492,000 -

$
Social Security Taxes $ $ + 49,200 49,200 -

5,800

$ 492,000
Power, heat & light $ 135,600

135,600

Case 6-1

Browning Manufacturing Company

Retained Earnings + $ 36,000 $ 36,000

Accumulated Depreciation + $ 907,200 140,400

$
$

829,560 68,576 898,136

$ 1,047,600

862,136

Estimated income tax expense

+ $ 58,000 $ 58,000 -

Capital Stock + $ 1,512,000 $ 1,512,000

Browning Manufacturing Company Projected Balance Sheet For the Year ended December 31, 2006
Assets Current asset: Cash and marketable securities Account receivable (net allowance for doubtful accounts) Inventories: Materials Less: Cost of goods sold (Schedule 1) Finished Goods Supplies Prepaid taxes and insurance Total current assets Other assets: Manufacturing plant at cost Less: Accumulated depreciation Total Assets Liabilities and Shareholders Equity Current liabilities: Accounts payable Notes payable Income taxes payable Total current liabilities Shareholders equity: Capital stock Retained earnings Total Liabilities and Shareholders Equity

443,640 201,360

124,520 210,448 352,368 22,080

709,416 91,920 1,446,336

2,822,400 1,047,600

1,774,800 $ 3,221,136

288,360 552,840 5,800

847,000 1,512,000 862,136

2,374,136 $ 3,221,136

Browning Manufacturing Company Statement of Cost of Goods Sold (Schedule 1) For the Year ended December 31, 2006
Finished goods inventory 1/1/06 Work in process inventory 1/1/06 Materials used Plus: Factory expenses Direct Manufacturing Labor Factory overhead Indirect manufacturing labor Power, heat and light Depreciation of plant Social Security Taxes Taxes and insurance, factoy Supplies Less: Work in process inventory 12/31/06 Cost of goods manufactured (completed) Less: Finished goods inventory 12/31/06 Cost of goods sold $ 257,040

$ $
$ $ 198,000 $ 135,000 $ 140,400 $ 49,200 $ 52,800 $ 61,200

172,200 811,000
492,000

$ 637,200 $ 2,112,400 $ 210,448 $ 1,901,952 $ 2,158,992 $ 352,368 $ 1,806,624

Case 6-1

Browning Manufacturing Company

Browning Manufacturing Company Projected Income Statement For the Year ended December 31, 2006

Sales Less: Sales returns and allowances Sales discounts allowed Net Sales Less: Cost of goods sold (Schedule 1) Gross Margin Less: Selling and administrative expense Operating income Less: Interest Expense Income before federal and state income tax Less: Estimated income tax expense Net Income

$ 2,562,000
$ 19,200 49,200 68,400 2,493,600 1,806,624 686,976 522,000 164,976 38,400 126,567 58,000 $ 68,576

Case 6-1

Browning Manufacturing Company

2. Exhibit 1 Balance Sheet, Projected 2005 vs. 2006

2005 Assets Cash & Marketable securities Accounts Receivable Inventories: Materials Work in Process Finished Goods Supplies Prepaid taxes and Insurance 2006 INC/DEC

$ 118,440 311,760

$ 443,640 201,360

+275% -55%

110,520 172,200 257,040 17,280 66,720

124,520 210,448 352,368 22,080 91,920

+13% +22% +37% +28% +38%

Case 6-1

Browning Manufacturing Company

2005 Liabilities: Account Payable Notes Payable Income Taxes Payable Shareholders equity Capital Stock Retained earnings $ 185,760 288,840 9000 2,341,560 1,512,000 829,560

2006 $ 288,360 552,840 5,800 2,374,136 1,512,000 862,136

INC/DEC +55% +91% -55% +1% 0% +4%

Case 6-1

Browning Manufacturing Company

2. Exhibit 2 - Statement Cost of Goods Sold, Projected 2005

2005
Finished goods inventory Work in process inventory Materials used Direct Manufacturing Labor Factory Overhead: Indirect manufacturing labor Power, heat and light Depreciation of plant Social Security Taxes Taxes and insurance, factory Supplies Cost of Goods Sold $ 257,040 172,200 663,120 419,040 170,640 116,760 126,600 42,120 46,320 56,880 1,568,280

2006
$ 352,368 210,448 811,000 492,000 198,000 135,600 140,400 49,200 52,800 61,200 1,806,624

INC/DEC
+37% +22% +22% +17% +16% +16% +11% +17% +14% +8% +15%

Case 6-1

Browning Manufacturing Company

2. Exhibit 3 Projected Income Statement, Projected 2005 v

2005
Sales Sales returns and allowances Sales discounts allowed Net Sales Cost of goods sold Gross Margin Selling and administrative expenses Operating income Interest Expense Income before federal and state income tax Estimated income tax expense Net Income $ 2,295,660 17,640 43,920 2,234,040 1,568,280 665,760 437,160 228,600 34,080 194,520 89,520 105,000

2006
$ 2,562,000 19,200 49,200 2,493,600 1,806,624 686,976 522,000 164,976 38,400 126,576 58,000 68,576

INC/DEC
+12% -8% -11% +12% +15% +3% +16% -28% +11% -35% -54% -35%

Case 6-1

Browning Manufacturing Company

With respect to Cash and Marketable Securities and Accounts Receivable, 2006 performance is expected to be better than 2005 performance. That is, Cash and Marketable Securities increased to 275% due to the decrease of Accounts Receivable by 55%. This means that the collection of accounts receivable by 2006 is fast. 2006 performance is expected to be worse than 2005 performance with respect to the following: 1. 2. 3. 4. 5. Accounts payable and notes payable will increase by 55% and 91%, respectively. Inventory turnover will be low. Increase of sales is only 12%. Almost all expenses will increase which will affect the companys net income. Net income will decrease by 35% due to less increase of sales and increase of expenses.

Case 6-1

Browning Manufacturing Company

3. Does the budget indicate that management will achieve it note payable repayment goal? If not, what do you suggest they do to achieve their minimum objective
The budget indicate that Browning Manufacturing Company fail to achieve its goal of at least $350,000 repayment for notes payable and have a year-end cash balance of $150,000. The budget shows that after repaying $350,000, year-end cash balance will fall at $93,640, short of $56,360. To be able to achieve this goal, Browning Manufacturing Company must increase their sales by using effective selling techniques. In this way, there will be high inventory turnover. Also, lessen the expenses and payables.

Case 6-1

Browning Manufacturing Company

4. Does the budget indicate managements inventory turnover goal will be achieved? If not, what do you suggest they do to improve the companys inventory turnover?
Inventory turnover = Cost of Goods Sold/Average Inventory
2005 Inventory turnover = 1,568,280/(218,820+257,040/2) = 6.5 2006 Inventory turnover = 1,806,624/(257,040+352,368/2) = 5.9
The budget does not indicate managements inventory turnover goal will be achieved. With the budget, there will be lower inventory turnover ratio, from 6.5 to 5.9 or (36/5.9) 61 days.

We suggest that the production be aligned based on the average cost of goods sold. And the company should only produce to how much the company could sell in a given period or should be aligned to the predicted demand.

Case 6-1

Browning Manufacturing Company

5. What does the budget indicate might happen to the companys trade credit standing? Accounts payable increased by 55% which is negative impact to suppliers. Increasing Brownings hanging balance in suppliers, less credit limit, which is risky on the supplier part.