Discussion:Inventory's - Cost Allocation
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Discussion Forum Index --> Basic Tax Questions --> Inventory's - Cost Allocation
Discussion Forum Index --> Tax Questions --> Inventory's - Cost Allocation
Actionbsns (talk|edits) said: | 7 March 2008 |
| I hope someone can help, I'm trying to do the journal entries on this client so I can go forward with the tax return, but I can't figure out what something means. Under Inventories, there is a category called "Ind Overhead Alloc". What would "Ind" be an abbreviation for? From the figures I've been given, it looks like the amount for this year might be around $5,000, however, in past years it's been more in the $25,000 t0 $30,000 range, it offsets to COGS, one accountant just used COGS and another set up an account called Overhead Contra. The explanation is "Record S262A Cost Allocation" and one year "Adjust 263A inventory to computed amount". I looked up Section 262A and 263A in the Tax code and it's not relative to inventory, so I don't understand what that reference is nor do I know how to compute it. I was hesitant to take on this client because they are a manufacturer and outside of college (which was a very long time ago) I haven't done these kinds of journal entries. It's intimidating, but the client and I have a very good working relationship and she's tired of her prior CPA, he's a little on the jerky side. I expressed my concerns, but she really wanted me to do this work. So far I've done OK, but this one has me really stumped. They also qualify for QPAD if that makes any difference. I haven't done one of those on a tax return yet either, so I'll probably be back asking for help when I get there. | |
DeacDiggler (talk|edits) said: | 7 March 2008 |
| Definitely talking about Sec. 263A - which is almost entirely about inventory - capitalization of indirect costs to inventory and self-constructed assets.
263A is pretty detailed - you need to find out what method your client has used in the past (get a copy of someone's workpaper) and continue to use it, but I'd suggest finding some help on that one if it's significant. | |
Actionbsns (talk|edits) said: | 7 March 2008 |
| Deac, you're right - I was looking at 263 (a), a few pages on is 263A. Anyway, how is the best way to get a workpaper from a previous accountant? Asking is obvious, I think the client might be able to ask. Is there a laymen's version of 263A that might make sense faster and easier? I'm tired and whiney right now, sorry about that. | |
TheTinCook (talk|edits) said: | 7 March 2008 |
| This IRS article is kind of interesting, but I think the only way to truely understand it is by spending some quality time with ยง1.263A-1. | |
Actionbsns (talk|edits) said: | 7 March 2008 |
| Thanks Tin Cook. I've been reading and re-reading that section for the last hour or so - my eyes are spinning. I finally went to Kleinrock and did a search. It's a little clearer there, kind of easier to read without all the "begats", but I was beginning to feel this doesn't apply to my client - they manufacture potatoe chips - but the site you provided makes it clearer yet. It looks like with some effort, I may be able to develop a work paper on my own if I can't get one from the previous accountant. The first accountant is the person I worked for when I first moved here, then she bailed from her own practice, gave this client to the dweeby guy I need to talk to and he's been doing it for the last few years. I'd really like to get my hands on the workpaper if I can. It might help make it clearer as well. Anyway, thanks for the help. | |
RoyDaleOne (talk|edits) said: | 7 March 2008 |
| The accountant(s) owes the workpaper to your client, and must give it up. It is part of your client's books and records, he was paid to produce the workpaper, not to keep it. | |
Taxstudent (talk|edits) said: | 7 March 2008 |
| Use Eugene Seago's book on inventories from CBC (a Thomson company) or the BNA portfolio on UNICAP. The layman's version is that any cost that is you capitalize direct materials and labor and all indirect costs that directly benefit or are incurred because of the production activities. It is not easy to work on without the regulations in front of you because they are so detailed and nuanced. | |
RoyDaleOne (talk|edits) said: | 7 March 2008 |
| Ind most likely is indirect. | |
Actionbsns (talk|edits) said: | 7 March 2008 |
| Thanks everyone for being so kind as to respond to this question. I printed out Kleinrock's version of the tax code which is easier to read and I have the big fat version of the Code as well. The IRS article TinCook directed me to is great, a little easier to digest and I wish I had time to get ahold of one of the books Taxstudent suggests, however, I think it's a good time to watch for a CPE on this topic since I have another client in the wings who I have been holding off for much the same reason. I called the client and she will call the CPA and ask him to FAX me his workpaper. I think that once I see that and how it goes together, along with this material, I'll probably be able to calculate this year's number with some degree of confidence. I'm also dredging up some memories from past accounting classes on this topic - it's slow, but it's also deeply buried, I may have to find my old Meigs accounting book for a little help. If I have any more questions, I hope you guys will still be available. | |
Actionbsns (talk|edits) said: | 10 March 2008 |
| Be thee warned! I received the prior CPA's workpaper this morning via FAX and will start work on this in the afternoon. I am now armed with the prior workpaper, my Quick Finder worksheet, IRS explanation of calculating this, Kleinrock's definition, as well as the 1.263A printed out (lots of paper!). So I'm going to be giving it my best shot. Hopefully, if I need help or maybe just a quick review of what I come up with you guys will be kind enough to still help and not think me to big of a PIA. | |
Actionbsns (talk|edits) said: | 11 March 2008 |
| I'm trying to follow the other CPA's spreadsheet in setting up a new one for 2007 and to understand how and why the numbers are what they are. I think I'm doing OK, but there is one entry that I can't trace back for 2006 and it sure looks like something is wrong on the other CPA's 2006 sheet. He did the indirect costs and their percentages, I'm good with that. Next he indicates "Allocation under the simplified method" there are three columns: Total, 263 A and Net, I understand how that works; followed by Cost of goods sold, less depreciation, less GE Tax, I'm good there, too. Last line is where I have trouble. Ending Inventory, the same three columns as beginning inventory, but these numbers don't tie to the financial statement like the others do and it looks as though two of the numbers are wrong. Beginning inventory (12/31/05) numbers are Total 63538.61, less 263A (36691.51), Net = 31847.10; Ending inventory (12/31/06) numbers are: Total = 70309.17, less 263A (36691.51), Net = $33617.66, of those three numbers, 33617.66 is the actual inventory cost on the balance sheet, but (36691.51) is the same number as the prior year, which makes the total number $70309.17 and that number is not on the balance sheet. His adjustment to "Inventory Ind Overhead Alloc" is $28151.50, where the prior year it was the $36691.51.
Later in the work paper he picks up the $28150.50 and using that number it begins to tie together. Am I wrong in thinking that for some reason that Ending inventory line is wrong? | |
DeacDiggler (talk|edits) said: | 11 March 2008 |
| sorry - can't follow this without a spreadsheet. My suggestion would be to pull out Reg. 1.263A-1 and see if you can't piece it together from there. Normally, you have a list of all indirect costs - and somehow someone allocates them into capitalizable vs. noncapitalizable buckets, using allocations provided by a client, etc. Mixed service costs are an offline item that factors into this too. Once you have the full amount that should be capitalized, the simplified methods typically require you to spread those costs among every dollar of COG available - i.e. COGS and ending inventory. In other words - divide it by your inventory turns and capitalize one inventory turn into ending inventory. It sounds like your client has an absorption ratio of 100%, which is REALLY high unless they are substantially undercosting inventory for books. Generally my experience is that anything over 10% is high. If you wanted to change, there are some automatic 263A method changes out there too.
good luck...sorry not to answer your questions. If it helps, I agree that it's unlikely that additional 263A costs would be the same from one year to the next. | |
Actionbsns (talk|edits) said: | 11 March 2008 |
| Thanks Deac, I'm looking at the absorption rate calculation and according to Kleinrock, it's calculation is Addtnl Sec 263A costs incurred ($154244.20 for my client) divided by Sec 471 costs incurred, which I understand to be the cost of inventory items ($145,722.55 for my client). My ratio comes out at 1.06, so I think I have something whacky there.
Also under Simplifeid Methods of Cost Allocation, there are de minimus rules stating if the total indirect costs in a tax year are $200,000 or less, "the additional section 263A costs allocable to inventory at the close of the tax year are deemed to be zero". How does that impact my client if his indirect costs are $154244.20? Thanks very much for your time and your help. | |
Actionbsns (talk|edits) said: | 12 March 2008 |
| Just want to bring this to the front. I'm still struggling with these costs. I think I almost have it then I get a new question. I've put it aside for a little while to finish another corporate client. Then, hopefully, with some cooling off time, my material will make more sense again and I can move forward. I do still have those two questions though. | |
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