Question Tag: FIFO Method

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  • 20 Marks

IMAC – DEC 2022 – L1 – Q4 – Accounting for Inventory and Labour

Explanation of inventory discrepancies, preparation of a FIFO inventory statement, sources of management information, and explanation of an investment center.

 

a) Inventory refers to the goods and materials that a business holds for the ultimate goal of resale, production, or utilization in the near future. Inventory could be in the form of raw materials, finished goods, work in progress, among others.

Required:
Identify FIVE (5) reasons actual inventory counted may be different from the balance in the inventory records. (5 marks)

a) Causes of discrepancies in closing inventory:

  • Theft by staff
  • Evaporation in the case of liquids and gas
  • Error in counting
  • Casting errors
  • Errors in recording
  • Over or understatement in stocks issued
  • Wrong classifications/coding
  • Error in counting at the time of receipt of stocks.
    (Any 5 points @ 1 mark each = 5 marks)

b) Statement of inventory movement (FIFO):

Date Receipt Issued Balance
2/1/2022 1,000 @ GH¢40 1,000 @ GH¢40 = GH¢40,000
5/1/2022 600 @ GH¢45 1,000 @ GH¢40 = GH¢40,000
600 @ GH¢45 = GH¢27,000
10/1/2022 800 @ GH¢40 200 @ GH¢40 = GH¢8,000
600 @ GH¢45 = GH¢27,000
11/1/2022 150 @ GH¢40 50 @ GH¢40 = GH¢2,000
600 @ GH¢45 = GH¢27,000
15/1/2022 1,200 @ GH¢42 50 @ GH¢40 = GH¢2,000
600 @ GH¢45 = GH¢27,000
1,200 @ GH¢42 = GH¢50,400
18/1/2022 850 @ GH¢42 50 @ GH¢40 = GH¢2,000
600 @ GH¢45 = GH¢27,000
350 @ GH¢42 = GH¢14,700
24/1/2022 900 @ GH¢48 1,000 @ GH¢42 = GH¢42,000
900 @ GH¢48 = GH¢43,200
(Marks are evenly spread using ticks = 10 marks)

c) Sources of management information: Examples

  • Internal: Ledger books, invoices, budget statements.
  • External: Internet, journals, print media, social media, reports from regulatory bodies.
    (2 marks)

d) An investment center is a segment of an organization that has the authority to invest resources of the organization, incur cost, and generate sufficient revenue to pay off the investment in assets. When a firm evaluates an investment center, it looks at the rate of return as measured by ROI and RI that it can earn on its investment.

  • 20 Marks

IMAC – MAY 2020 – L1 – Q4 – Accounting for Inventory and Labour | Standard Costing and Variance Analysis

Compare FIFO and weighted average inventory valuation, compute profit, and explain standard costing concepts.

a) Grains Dealers Ltd is in the business of buying farm produce in bulk from out-growers for onward sale to manufacturers. In view of the huge volumes of receipt and sale transactions, the company is unable to use the specific pricing method for valuing inventories. The company needs advice on the impact on profit of using the FIFO or Weighted Average methods of inventory valuation. The following data has been extracted for the month of October 2019 for use:

Inventory balance as at 01/10/19 was 800 units at GH¢4 per unit.

Date Purchases Sales
Quantity Price (GH¢)
05/10/2019 1,200 5.00
10/10/2019
12/10/2019 1,500 6.00
15/10/2019 1,800 7.25
18/10/2019
25/10/2019 2,400 8.00
28/10/2019

Additional information:
A physical inventory count on 31 October 2019 revealed a shortage of 200 units.

Required:
i) Prepare the inventory ledger showing the value of costs of inventory sold, and the closing inventory on the basis of the perpetual inventory valuation system under:

  • FIFO Method (6 marks)
  • Weighted Average Method (6 marks)

ii) Compute the profit for the month for each method in columnar form. (3 marks)

b) Explain the following as used in standard costing and variance analysis:
i) Ideal standard;
ii) Attainable standard; (5 marks)

a)
i) FIFO METHOD – INVENTORY LEDGER

Date Receipts Issues Balance
Qty GH¢ Qty
01/10/19 800 4.00
05/10/19 1,200 5.00
800
10/10/19 800
700
12/10/19 1,500 6.00
15/10/19 1,800 7.25
18/10/19 500
1,500
1,400
25/10/19 2,400 8.00
28/10/19 400
1,600
31/10/19 Shortage 200
Total
(6 marks evenly spread using ticks)

WEIGHTED AVERAGE METHOD – INVENTORY LEDGER

Date Receipts Issues Balance
Qty GH¢ Qty
01/10/19 800 4.00
05/10/19 1,200 5.00
10/10/19 1,500
12/10/19 1,500 6.00
15/10/19 1,800 7.25
18/10/19 3,400
25/10/19 2,400 8.00
28/10/19 2,000
31/10/19 Shortage 200
Total
(6 marks evenly spread using ticks)

ii) Computation of Profit for the Month

FIFO Weighted Average
GH¢ GH¢ GH¢
Sales 74,000 74,000
Cost of Sales
Opening inventory 3,200 3,200
Purchases 47,250 47,250
Closing inventory (4,800) (4,662)
Total 45,650 45,788
Gross Profit 28,350 28,212
(3 marks)

b)
i) Ideal Standard

  • An ideal standard is a standard set under the most favorable conditions with no allowances for inefficiencies such as waste, spoilage, or machine downtime. These standards are achievable only under perfect conditions and serve to highlight and monitor the full cost of factors such as waste.

ii) Attainable Standard

  • An attainable standard is set at levels that assume efficient levels of operation but includes allowances for factors like losses, waste, and machine downtime. This type of standard is more realistic and motivational, as it provides some allowance for unavoidable inefficiencies.

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