Question Tag: Weighted Average Method

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  • 20 Marks

IMAC – AUG 2022 – L1 – Q4 – Inventory Management

Calculation of cost of goods issued and closing inventory using the weighted average method, and identification of causes for material and labour cost variances.

Question: a) The following extracts are from the books of Bediako Enterprise in the month of February:

Date Description Units Per unit cost (GH¢)
01 Receipts 400 42
04 Receipts 700 45
07 Issue 450
10 Receipts 600 48
14 Issue 700
20 Receipts 1,200 50

Required: Using the Weighted Average Method;

i) Calculate the cost of goods issued to Cost of Sales. (3 marks)

ii) Compute the value of closing inventory. (12 marks)

b) Identify TWO (2) possible causes for each of the following variances:

i) Material cost variance.

ii) Labour cost variance. (5 marks)

b)
i) Possible Causes of the Materials Price Variance
If the standard price is reasonable, then a materials price variance may be caused
by such valid factors as the following:
 Rush deliveries
 Market-driven pricing changes, such as changes in the prices of commodities
 Bargaining power changes by suppliers, who may be able to impose higher
prices than expected
 Buying in unusually large or small volumes in comparison to what was expected
when the standard was created
 A change in the quality of the materials purchased
ii) The possible causes of labor rate variance are:
 Payment at a higher or lower rate than the standard
 Changes in employee skills
 Recruitment of new personnel
 Changes in compensation methods, etc.
(Any 2 points for each variance @ 1.25 mark each = 5 marks)

  • 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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