Overhead Calculations and Inventory
Feb 01, 2016
One question we often hear is, who must include overhead in their inventory, how much should be included, and how should it be calculated? There are three important factors associated with overhead and inventory which must be considered before answering these questions. One, the Generally Accepted Accounting Principles (GAAP) which require overhead to be included in inventory. Two, the federal income tax rules which require overhead to be included in inventory. Three, management reporting considerations which may or may not include inventory in the product cost.
These three factors are completely separate and in many cases, are unrelated. In addition, each may have completely varying objective which must be considered before the question of how much overhead in inventory can be answered.
For the consideration of GAAP, there is an entire section of new Generally Accepted Accounting Principles devoted strictly to how much overhead should be included in inventory. The rules are rather general which provides the preparer of the financial statements latitude in determining exact methods of computation and amounts. The rules are specific with regard to the overhead being included. The inventory will be misstated if the type of business requires the inclusion of overhead and is not completed. This rule has far-reaching implications in many business situations, particularly those where a buyer is purchasing a certain amount of inventory and a seller is selling a certain amount of inventory in a merger or acquisition transaction. The accuracy of the inventory can be crucial to determining the correct price and inventory value not in accordance with GAAP, which can have a large negative impact depending on the size of the misstatement and when it is discovered.
The second consideration involves federal income tax rules. Many years ago, the Internal Revenue Service developed code section 471 which has to do with the inclusion of overhead in inventory for tax purposes. The IRS was specific about manufacturers which meet certain criteria being required to allocate a certain amount of overhead to inventory. The regulations did, in fact, provide specific guidance as to how this would be achieved. Code section 471 was the standard of tax accounting of overhead in inventory for many years until code section 263A was developed in the mid-80s. These new rules expanded the definition of who was required to include overhead into inventory and added certain elements of cost that must be included in the inventory calculation excluded from the 471 regulations. Code section 263A was not in replacement of 471, but rather was an addition to 471 should be considered by every manufacturing taxpayer and many distribution taxpayers. It has been my experience that IRS auditors are trained to look for the inclusion of 263A in manufacturing inventories and regularly do so as part of their normal auditing procedures associated with the manufacturer.
The last item of consideration associated with overhead inventory is related to management reporting. This consideration has little or no rules associated with it and is highly dependent on the specific need for the management information.
For instance, if management is attempting to use individual product cost for a make versus buy decision, then the cost of the product might exclude certain overheads which may normally be included in the inventory calculation. However, if management is requesting information associated with product profitability by customer or product type, then it may include overheads not included with inventory valuations. The specific nature of management information as it relates to product cost and especially overhead in inventory or overhead is in each case unique and dependent on the ultimate uses by the management team of the information. General rules and guidelines can sometimes develop misleading results and should be reconsidered every time there is a recalculation of product costs for management purposes.
Categories: Cost Accounting
Job-Related Education Expense Deductions
Jan 29, 2016
Are you planning on taking a job-related class? If you are, you may be able to deduct your education expenses.
Basic Rules
Education expenses are deductible if the education:
- Maintains or improves skills required in your business or employment, or
- Meets the express requirements of either your employer or the law as a condition of retaining your salary, status, or employment.
However, the rules can be tricky to apply. Educational costs will not be deductible if they are incurred to enter a field (as opposed to staying in one) or if they qualify you for a new trade or business. Therefore, an aspiring doctor may not deduct the costs of medical school, but he or she could potentially deduct the cost of courses necessary to maintain his or her medical skills.
In a recent case, an attorney who was admitted to practice law in Germany sought to deduct law school expenses he had incurred to enable him to practice in New York. The taxpayer argued that the expenses allowed him to maintain his general skills as a lawyer. The Tax Court disagreed, however, reasoning that the education qualified him to satisfy the New York entrance requirements and therefore enter a new trade or business.
Itemized Deduction
Education expenses must be claimed as a miscellaneous itemized deduction. They are deductible only to the extent that they – along with your other miscellaneous expenses – exceed 2% of your adjusted gross income.
Other Alternatives
Instead of taking this deduction, you may want to see if you’re eligible to claim a tax credit for a portion of qualified tuition and related expenses. The American Opportunity credit is limited to undergraduate courses, but the Lifetime Learning credit may be claimed for most post-high-school education at eligible education institutions.
Categories: Other Resources
The Affordable Care Act: Compliance for Employers
Jan 26, 2016
- 50-99 employees – Employers did not need to offer health care coverage until this year, 2016.
- More than 100 employees – Employers were only required to offer coverage to 70% of employees and their dependents) starting in 2015. Starting in 2016, employers have to offer coverage to 95% of their employees to avoid a penalty.
- The Internal Revenue Code §6056 requires an applicable large employer (ALE) (50 or more employees hired in any calendar year) to file and furnish information relating to the health insurance that it offers (or does not offer) to its full-time employees and their dependents. This information is provided to assist the IRS with administering the ACA Employer Mandate (generally requires ALEs to offer coverage to their full-time employees and their dependents or be subject to a potential penalty). This information also assists the IRS with administering the premium tax credit provided to individuals who enroll in coverage through the Marketplace (Exchange).
These notifications are reported on forms 1095-B and 1095-C. A form 1094 is the transmittal form for each of these notifications. Form 1095-B is for small or large employers that offer a self-funded plan (and for insurance companies). Form 1095-C is for Applicable Large Employers ALEs (50 or more employees) to report their health care plan that meets minimum value and affordability standards or face a penalty for each employee receiving subsidized coverage through the Marketplace (Exchange).
Fortunately, the IRS issued extensions to employers who must file either form 1095-B or 1095-C. The deadline to submit to the IRS and distribute these forms to covered individuals was extended until March 31, 2016. The deadline for this form is May 31, 2016 (if filing in paper) or June 30, 2016 if filing electronically. An extension is automatically granted for 30 days if the employer files an extension with the IRS before the deadline, either in paper or electronically.
If you required additional information or have questions about how the ACA may affect your business, please give your William Vaughan Company representative a call.
Categories: Healthcare & Dentistry
Affordable Care Act Compliance Part II: The Employer
Jan 25, 2016
- 50-99 employees – Employers did not need to offer health care coverage until this year, 2016.
- More than 100 employees – Employers were only required to offer coverage to 70% of employees and their dependents) starting in 2015. Starting in 2016, employers have to offer coverage to 95% of their employees to avoid a penalty.
- The Internal Revenue Code §6056 requires an applicable large employer (ALE) (50 or more employees hired in any calendar year) to file and furnish information relating to the health insurance that it offers (or does not offer) to its full-time employees and their dependents. This information is provided to assist the IRS with administering the ACA Employer Mandate (generally requires ALEs to offer coverage to their full-time employees and their dependents or be subject to a potential penalty). This information also assists the IRS with administering the premium tax credit provided to individuals who enroll in coverage through the Marketplace (Exchange).
These notifications are reported on forms 1095-B and 1095-C. A form 1094 is the transmittal form for each of these notifications. Form 1095-B is for small or large employers that offer a self-funded plan (and for insurance companies). Form 1095-C is for Applicable Large Employers ALEs (50 or more employees) to report their health care plan that meets minimum value and affordability standards or face a penalty for each employee receiving subsidized coverage through the Marketplace (Exchange).
Fortunately, the IRS issued extensions to employers who must file either form 1095-B or 1095-C. The deadline to submit to the IRS and distribute these forms to covered individuals was extended until March 31, 2016. The deadline for this form is May 31, 2016 (if filing in paper) or June 30, 2016 if filing electronically. An extension is automatically granted for 30 days if the employer files an extension with the IRS before the deadline, either in paper or electronically.
If you required additional information or have questions about how the ACA may affect your business, please give your William Vaughan Company representative a call.
Categories: Healthcare & Dentistry
Manufacturing Tooling Costs
Jan 25, 2016
Depending on the type of product your business produces and how often, tooling may be a significant cost. For some businesses, tools last a considerable amount of time. In such a scenario, given the durability of the tools and the frequency of their use, it is safe to assume the cost of the tooling is recovered in the sale of the products. However, if the margins overall are very tight, some degree of a tooling cost should be noted in the estimate.
For specialized products, tooling is a necessity and can be traced directly to those products. This type of tooling may last a long period of time, or for only a few products, but regardless it is most likely directly related. As a result, it should be assigned directly to the given product or process and recovered through that individual product’s cost.
I met with a client a few weeks ago who wanted to factor tooling into their total product cost. However, the business was struggling do so accurately. This client’s environment was a bit different than those described above. The company currently pays for tooling required in the production of merchandise they are buying for an outside customer. The client wanted to recover this cost in the products, which is relatively simple as they know exactly with which products to associate the tooling cost. However, the greater dilemma was determining at what rate. Management attempted to approximate how many of each product would be ordered and divide the tooling cost by that amount. For example, if 1,000 parts were ordered and the tooling cost was $400 then $2.50 would be added to each item’s standard cost. However, what happens if they ordered 1,500 parts? Or only 200 parts? If 1,500 parts were ordered, then the additional cost was only $.68 per part. Does this mean the extra $1.82 is just profit? Of course extra profit is welcomed, but what if a miscalculation caused the selling price to be higher than the market would tolerate. This could create a serious issue. In the case of under costing, they would lose a substantial amount of money.
What would you recommend for tooling or what have you done that is working or maybe isn’t working?
In the end, it is most important to recover the costs as best as you possibly can. Over or under recovering can equally create issues that are not able to be sustained.
My client must continue to offer their best estimate of how many of each product will be ordered and allocate the cost that way. However, they need to make sure they are coming close to their estimates, and if not, its time to re-evaluate their process.
Categories: Cost Accounting