Topic 6 Inventory Valuation Exercise_Final Exam Sem May 2013

8/12/2019 Topic 6 Inventory Valuation Exercise_Final Exam Sem May 2013

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Final Exam Sem May 2013 (Inventory Valuation)

The following inventory information is taken from Kaka Tradings store for January2013:

Jan Purchases Jan Sales

Unit RM Unit

1 50 3.00 4 70

3 100 3.15 10 100

6 120 3.25 29 170

23 100 3.40

31 50 3.50

Total 420 Total 340

The business uses perpetual inventory system. During the month of January, the business

sold 340 units at the price of RM4.00 per unit.

Using the First In First Out (FIFO) and Weighted Average methods, you are required to:

i) prepare appropriate tables to show the movement of inventory

(10)

ii) show the effects on profit and loss

(8)

ii) Based on your above analysis, explain which inventory valuation method should

Kaka Trading use. Justify.

Answer:

i) The movement of inventory:

First In First Out (FIFO) methodDate Purchase at Cost

Value (RM)

Sales

Quantity(unit)

Sales at Cost Value Balance (Value of

Ending Inventory)

1/1 50@ RM3.00

3/1 100 @ RM3.15 50 @ RM3.00100@RM 3.15

4/1 70 50 @ RM3.0020 @ RM 3.15

80 @ RM3.15

6/1 120@ RM3.25 600 @ RM4.70 80 @ RM3.15


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120 @ RM3.25

10/1 100 80 @ RM3.1520 @ RM3.25

100 @ RM3.25

23/1 100 @ RM3.40 100 @ RM3.25100 @ RM3.40

29/1 170 100 @ RM 3.2570 @ RM 3.40

30 @ RM 3.40

30/1 50 @ RM 3.50 30 @ RM3.4050 @ RM 3.50

Weighted Average

Date Purchase at Cost

Value (RM)

Sales

Quantity

(unit)

Sales at Cost Value Balance (Value of

Ending Inventory)

1/1 50@ RM3.00

3/1 100 @ RM3.15 (50 @ RM3.00) +100 @ RM 3.15= RM 150 + RM315

50 + 100= RM 465

150= RM 3.10

150 @ RM3.10

4/1 70 @ RM3.10

80 @ RM3.10

6/1 120@ RM3.25 (80 @ RM3.10) +120 @ RM 3.25= RM 248 + RM390

80 + 120= RM 638

200= RM 3.19

200 @ RM3.19

10/1 100 @ RM3.19

100 @ RM3.19

23/1 100 @ RM3.40 (100 @ RM3.19) +100 @ RM 3.40= RM 319 + RM340

100 + 100= RM 659

200= RM 3.30

200 @ RM3.30

29/1 170 @ RM3.30

30 @ RM 3.30
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30/1 50 @ RM 3.50 (30 @ RM3.30) +50 @ RM 3.50= RM 99 + RM 175

30 + 50= RM 274

80= RM 3.43

80 @ RM3.43

ii) effects on profit or loss:

Cost Of Goods Sold (COGS):

FIFO = (50 @ RM3.00) + (20 @ RM 3.15) +(80 @ RM 3.15) + (20 @ RM 3.25) +(100 @ RM 3.25) +( 70 @ RM 3.40)

= RM 1,093Weighted Average = (70 @ RM3.10) + (100 @ RM 3.19) +

(170 @ RM 3.30)

= RM 1,097

Gross profit:

FIFO = SalesCOGS= (340 x RM 4.00) RM 1,093= RM 1,360 RM 1,093= RM 267

Weighted Average = SalesCOGS= (340 x RM 4.00) RM 1,097= RM 1,360 RM 1,097

= RM 263

iii)

FIFO method

Cost Of Goods Sold under FIFO method is lower compared to the Weighted

Average method. This means that income reported for January would be much

higher, RM267 using the FIFO cost-flow assumptions. FIFO method gives better

profit with the excess amount of RM4.
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Topic 6 Inventory Valuation Exercise_Final Exam Sem May 2013