Ending Finished Goods Inventory Budget Definition
The ending finished goods inventory budget calculates the cost of the finished goods inventory at the end of each budget period. It also includes the unit quantity of finished goods at the end of each budget period, but the real source of that information is the production budget. The primary purpose of this budget is to provide the amount of the inventory asset that appears in the budgeted balance sheet, which is then used to determine the amount of cash needed to invest in assets. If you do not intend to create a budgeted balance sheet, there is no need to create an ending finished goods inventory budget. When a company needs to closely monitor its cash balances on an ongoing basis, the ending finished goods inventory budget should not only be created, but also updated on a regular basis.
The ending finished goods inventory budget contains an itemization of the three main costs that are required to be included in the inventory asset under both generally accepted accounting principles and international financial reporting standards. These costs and their derivation are:
- Direct materials. The cost of materials per unit (as listed in the direct materials budget), multiplied by the number of ending units in inventory (as listed in the production budget).
- Direct labor. The direct labor cost per unit (as listed in the direct labor budget), multiplied by the number of ending units in inventory (as listed in the production budget).
- Overhead allocation. The amount of overhead cost per unit (as listed in the manufacturing overhead budget), multiplied by the number of ending units in inventory (as listed in the production budget).
If there are many types of products expected to be in ending inventory, it may be too difficult to calculate this budget on an item-by-item basis. If so, an alternative is to create an approximate cost per unit based on general classifications of inventory types; this derivation is usually based on historical costs, modified for costs expected to be incurred during the budget period.
Example of the Ending Finished Goods Inventory Budget
Georgia Corporation sells a single product, and has derived its main cost components in the product budget, direct materials budget, and manufacturing overhead budget. Its ending finished goods inventory cost calculation follows:
Ending Finished Goods Inventory Budget
For the Year Ended December 31, 20XX
|Qtr 1||Qtr 2||Qtr 3||Qtr 4|
|Cost per unit:|
|+ Direct materials cost||$12.50||$12.50||$12.75||$12.75|
|+ Direct labor cost||4.00||4.50||4.50||4.50|
|+ Manufacturing O/H cost||6.50||6.50||6.50||6.75|
|= Total cost per unit||$23.00||$23.50||$23.75||$24.00|
|Ending finished goods units||8,000||12,000||10,000||9,000|
|x Total cost per unit||$23.00||$23.50||$23.75||$24.00|
|= Ending F/G inventory||$184,000||$282,000||$237,500||$216,000|
Georgia Corporation is expecting the cost of materials to increase in the third quarter, as well as to boost its direct labor cost in the second quarter as the result of a union agreement, and to increase its manufacturing overhead cost in the fourth quarter because of a scheduled rent increase. All of these factors increase the cost of the product from $23.00 per unit at the end of the first quarter to $24.00 at the end of the fourth quarter.