How to Calculate Fixed Manufacturing Overhead Cost Deferred in Inventory
As a manufacturer, it’s crucial to keep track of your fixed manufacturing overhead costs to accurately calculate the cost of goods sold (COGS) and ensure your business is profitable. However, if your goods remain unsold at the end of the accounting period, you must defer the cost of manufacturing these goods in inventory. In this article, we will walk you through how to calculate the fixed manufacturing overhead cost deferred in inventory and adjust the COGS for the period.
Understand the Concept of Fixed Manufacturing Overhead Cost
Before we dive into the process of calculating the fixed manufacturing overhead cost deferred in inventory, let’s first define what this cost includes. Fixed manufacturing overhead cost refers to the expenses incurred during the manufacturing process that are not directly tied to the production of a specific product. These expenses include rent, utilities, salaries, and other costs that are necessary to operate a manufacturing facility.
Understand the Concept of Deferred Inventory
Deferred inventory refers to goods that have been produced but not yet sold. These goods are stored in inventory until they are sold to customers. The cost of manufacturing these goods is included in the COGS when they are sold. However, if the goods remain unsold at the end of the accounting period, the cost of manufacturing them must be deferred in inventory.
Determine the Total Fixed Manufacturing Overhead Cost
To calculate the fixed manufacturing overhead cost deferred in inventory, you first need to determine the total fixed manufacturing overhead cost for the accounting period. This can be done by adding up all the fixed manufacturing overhead costs incurred during the period. These costs may include rent, utilities, salaries, and other expenses necessary to operate a manufacturing facility.
Determine the Total Units Produced
Next, you need to determine the total number of units produced during the accounting period. This can be done by adding up the number of units produced each month or by using the total production for the period. This information is crucial for determining the cost per unit of fixed manufacturing overhead.
Calculate the Fixed Manufacturing Overhead Cost per Unit
To calculate the fixed manufacturing overhead cost per unit, divide the total fixed manufacturing overhead cost by the total number of units produced. This will give you the cost per unit of fixed manufacturing overhead. This cost can then be used to calculate the fixed manufacturing overhead cost deferred in inventory.
Determine the Units Remaining in Inventory
To calculate the fixed manufacturing overhead cost deferred in inventory, you need to determine the number of units that remain unsold at the end of the accounting period. This can be done by taking a physical count of the inventory or by using the inventory records. Knowing the number of units remaining in inventory is crucial for accurately calculating the fixed manufacturing overhead cost deferred in inventory.
Calculate the Fixed Manufacturing Overhead Cost Deferred in Inventory
To calculate the fixed manufacturing overhead cost deferred in inventory, multiply the cost per unit of fixed manufacturing overhead by the number of units remaining in inventory. This will give you the total cost of fixed manufacturing overhead deferred in inventory. This cost must be recorded on the balance sheet as an asset.
Record the Deferred Fixed Manufacturing Overhead Cost
The fixed manufacturing overhead cost deferred in inventory must be recorded as an asset on the balance sheet. To record this, create a new account called ‘Deferred Fixed Manufacturing Overhead’ and credit this account for the total cost deferred in inventory. Debit the ‘Manufacturing Overhead’ account for the same amount to balance the journal entry.
Adjust the Cost of Goods Sold
Since the cost of manufacturing the unsold goods has not yet been expensed, it cannot be included in the COGS for the period. To adjust the COGS, add the fixed manufacturing overhead cost deferred in inventory to the COGS for the period. This will give you the adjusted COGS for the period.
Reverse the Deferred Fixed Manufacturing Overhead Cost
When the goods are sold, the fixed manufacturing overhead cost deferred in inventory must be removed from the balance sheet and recorded as an expense on the income statement. To do this, debit the ‘Deferred Fixed Manufacturing Overhead’ account for the total cost and credit the ‘Cost of Goods Sold’ account for the same amount. This will reverse the deferred fixed manufacturing overhead cost and record it as an expense.
Conclusion
Calculating fixed manufacturing overhead cost deferred in inventory can be a complex process, but it is important for accurately reporting the financial health of a manufacturing business. By following these steps, you can calculate the amount of fixed manufacturing overhead cost that is deferred in inventory and accurately adjust the COGS for the period.
