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- 20 Marks
Question
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)
Answer
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.
- Tags: FIFO Method, Inventory Valuation, Standard Costing, Weighted Average Method
- Level: Level 1
- Uploader: Joseph