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Chapter 7
Materials: Controlling and Costing
Discussion Questions
1) The most frequent use forms in the procurement and use of materials are: purchase requisition, purchase order, receiving report, material requisition, bill of materials, and materials ledger card.
2) For these incidental purchases, the same procedure applies as for productive materials. At times, a blanket purchase order is issued to cover repetitive services such as typewriter repairs. However for responsibility control purposes, a purchase order is advisable even though this type of form might add more paperwork.
3) The invoice should be routed to the accounting department immediately upon receipt. A copy of the purchase order and a copy of the receiving report with an inspection report attached thereto should be compared by the accounting clerk, when the invoice is found to be correct in all aspects or has been adjusted for errors or rejects, the accounting clerk approved the invoice, attaches it to the underlying documents, and sends these papers to another clerk for the preparation of the voucher.
4) 360/ 60 – 10 = 7.2 x 2% = 14.4%
5) (a) Inventoriable cost is purchase price less purchase discount add freight in & applied acquisition costs. (b) Administrative costs are not Inventoriable.
6) Several methods are possible: (a) Inventory differences (b) Metering conveyor belt (c) use of factors
7) The average cost method assumes that each batch taken from the storeroom is composed of uniform quantities from each shipment in stock at the date of issue. The IFO method is based on the assumption that the first goods received are the first issued. The LIFO method is based on the assumption that the latest goods received are the first issued.
8) In an inflation economy, LIFO provides a better matching of current costs with current revenue
because costs of inventory issued are at more recent purchase prices. Net cash inflow is generally increased because taxable income is generally decreased, resulting in payment of lower income tax.
9) (a) FIFO (b) FIFO (c) FIFO (d) LIFO (e) FIFO (f) LIFO (g) LIFO (h) LIFO (i) LIFO (j) FIFO (k) LIFO (l) LIFO (m) FIFO (n) FIFO
10) Although it is common to speak of a method of inventory costing, it is also the method of costing materials into production. Since the cost of materials issued during a fiscal period is usually much greater than the ending inventory, and since the cost of goods sold is much more significant than the inventory figure, the principal impact is on the income statement and not on the balance sheet.
11) (1) In principle inventories are to be valued at cost. (2) Where cost cannot be recovered upon sale in the ordinary course of business, a lower figure is to be used. (3) This lower figure is normally market replacement cost.
12) The lower figure is normally market replacement cost, except that the amount should not exceed the expected sales price less a deduction for costs yet to be incurred in making the sale. On the other hand this lower market figure should not be less than expected amount to be realized in the sale of goods, reduced by a normal profit margin.
13) To be most accurate, dollars received from the sale of scrap reduces the cost of materials. The credit from scrap sales would then be to work in process if the scrap comes from materials issued for production, or to factory overhead control if the material was issued for indirect use.
14) Scrap and waste materials are likely to have relatively little value compared to the original cost of materials from which the scrap is generated. Therefore, it is important that the quantity of scrap and waste be controlled by introducing corrective measures before preventable losses occur.
15) When defective production is inherent in the manufacturing process, or occurs with a reasonable degree of predictability, or is not caused by special conditions, or provisions of a particular order, the job should carry a proportionate cost of the spoiled and
defective work. Therefore this cost should be treated as Factory Overhead. Likewise the added cost of bringing defective units up to standard quality should be treated as factory overhead.
Exercises
E-1
Total Freight = $ 162
1)
On cost bases (Freight allocation):
Pepto : Lenco : Bilco
1125 : 1350 : 1575
225 : 270 : 315
45 : 54 : 63
15 : 18 : 21
5 : 6 : 7
Total ratio = 5 + 6 + 7 = 18
Pepto = 162 × 5/18 = $ 45
Lenco = 162 × 6/18 = $ 54
Bilco = 162 ×1/18 = $ 63
$ 162
2)
On weight bases (Freight allocation)
Pepto : Lenco : Bilco
450 : 600 : 750
9 : 12 : 15
3 : 4 : 5
Total ratio = 3 + 4 + 5 = 12
Pepto = 162 × 3/12 = $ 40.5
Lenco = 162 × 4/12 = $ 49.8
Bilco = 162 × 5/12 = $ 67.5
$ 162
E-2
Material Costing Method
1)
Average costing
Date Receipts Issue Balance
Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 500 @ 1.20 600
6 200 @ 1.25 250 700 @ 1.214 850
10 400 @ 1.30 520 1100 @ 1.245 13750
15 560 @ 1.245 697 540 @ 1.245 672
25 500 @ 1.40 700 1040 @ 1.319 1372
27 400 @ 1.319 527.6 640 @ 1.319 844.160
Purchases= 1470 C.G.S = 1225 Closing stock = 844.160
2)
LIFO Costing
Date Receipts Issue Balance
Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 500 @ 1.20 = 600
6 200 @ 1.25 = 250 500 @ 1.20 = 600
200 @ 1.25 = 250
10 400 @ 1.30 = 520 500 @ 1.20 = 600
200 @ 1.25 = 250
400 @ 1.30 = 520
15 400 @ 1.30 = 520
160 @ 1.25 = 200
500 @ 1.20 = 600
40 @ 1.25 = 50
25 500 @ 1.40 = 700 500 @ 1.20 = 600
40 @ 1.25 = 50
500 @ 1.40 = 700
27 400 @ 1.40 = 560 500 @ 1.20 = 600
40 @ 1.25 = 50
100 @ 1.40 = 140
Purchases= 1470 C.G.S = 1280 Closing stock = 790
3)
LIFO Costing
Date Receipts Issue Balance
Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 500 @ 1.20 = 600
6 200 @ 1.25 = 250 500 @ 1.20 = 600
200 @ 1.25 = 250
10 400 @ 1.30 = 520 500 @ 1.20 = 600
200 @ 1.25 = 250
400 @ 1.30 = 520
15 500 @ 1.20 = 600
60 @ 1.25 = 75
140 @ 1.25 = 175
400 @ 1.30 = 520
25 500 @ 1.40 = 700 140 @ 1.25 = 175
400 @ 1.30 = 520
500 @ 1.40 = 700
27 140 @ 1.25 = 175
260 @ 1.30 = 338
140 @ 1.30 = 182
5000 @ 1.40 = 700
Purchases= 1470 C.G.S = 1288 Closing stock = 882
E-3
1)
FIFO
Date Receipts Issue Balance
Oct unit U.cost
Bal unit U.cost Bal unit U.cost Bal
1 700 @ 5 = 3500
3 400 @ 5 = 2000 300 @ 5 = 1500
4 300 @ 5.20 = 1560 300 @ 5 = 1500
300 @ 5.20 = 1560
8 300 @ 5.20 = 1560 300 @ 5 = 1500
600 @ 5.20 = 3120
9 300 @ 5 = 1500
200 @ 5.20 = 1040
400 @ 5.20 = 520
11 300 @ 5.20 = 1500 100 @ 5.20 = 520
13 1000 @ 5.10 = 5100 100 @ 5.20 = 520
1000 @ 5.10 = 5100
21 400 @ 5.50 = 2200 100 @ 5.20 = 520
1000 @ 5.10 = 5100
400 @ 5.50 = 2200
23 100 @ 5.20 = 520
500 @ 5.10 = 2550
500 @ 5.10 = 2550
400 @ 5.50 = 2200
27 500 @ 5.10 = 2550
300 @ 5.50 = 1650
100 @ 5.50 = 550
29 300 @ 5.60 = 1680 100 @ 5.50 = 550
300 @ 5.60 = 1680
Cost of material used = 13370
Closing inventory = 2230
2)
FIFO
Date Receipts Issue Balance
Oct unit U.cost
Bal unit U.cost Bal unit U.cost Bal
1 700 @ 5 = 3500
3 400 @ 5 = 2000 300 @ 5 = 1500
4 300 @ 5.20 = 1560 300 @ 5 = 1500
8 300 @ 5.20 = 1560 300 @ 5.20 = 1560
300 @ 5 = 1500
600 @ 5.20 = 3120
9 500 @ 5.20 = 2600 300 @ 5 = 1500
100 @ 5.20 = 520
11 100 @ 5.20 = 520
200 @ 5 = 1000
100 @ 5 = 500
13 1000 @ 5.10 = 5100 100 @ 5 = 500
1000 @ 5.10 = 5100
21 400 @ 5.50 = 2200 100 @ 5 = 500
1000 @ 5.10 = 5100
400 @ 5.50 = 2200
23 400 @ 5.50 = 2200
200 @ 5.10 = 1020
100 @ 5 = 500
800 @ 5.10 = 4080
27 800 @ 5.10 = 4080 100 @ 5 = 500
29 300 @ 5.60 = 1680 500 @ 5 = 500
300 @ 5.60 = 1680
Cost of material used = 13420
Closing inventory = 2180
3)
Average costing
Date Receipts Issue Balance
Oct unit U.cost Bal unit U.cost Bal unit U.cost Bal
1 700 @ 5 = 3500
3 400 @ 5 = 2000 300 @ 5 = 1500
4 300 @ 5.20 = 1560 600 @ 5.1 = 3060
8 300 @ 5.20 = 1560 900 @ 5.13 = 4620
9 500 @ 5.13 = 1539 100 @ 5.13 = 2052
11 300 @ 5.13 = 1539 100 @ 5.13 = 513
13 1000 @ 5.10 = 5100 1100 @ 5.10 = 5613
21 400 @ 5.50 = 2200 1500 @ 5.21 = 7813
23 600 @ 5.21 = 3126 900 @ 5.21 = 4689
27 800 @ 5.21 = 4168 100 @ 5.21 = 521
29 300 @ 5.60 = 1680 400 @ 5.50 = 2201
Cost of material used =13398
Closing inventory =2210
E-4
Material Costing Method
1)
FIFO
Date Receipts Issue Balance
Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 800 @ 6 = 4800
5 200 @ 7 = 1400 800 @ 6 = 4800
200 @ 7 = 1400
16 400 @ 6 = 2400 800 @ 6 = 4800
200 @ 7 = 1400
200 @ 8 = 1600
24 300 @ 9 = 2700 400 @ 6 = 2400
200 @ 7 = 1400
200 @ 8 = 1600
300 @ 9 = 2700
27 400 @ 6 = 2400
100 @ 7 = 700
100 @ 7 = 700
200 @ 8 = 1600
300 @ 9 = 2700
Cost of material used = $ 5500
October 31 inventory = $ 5000
2)
FIFO
Date Receipts Issue Balance
Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 800 @ 6 = 4800
5 200 @ 7 = 1400 800 @ 6 = 4800
200 @ 7 = 1400
9 200 @ 8 = 1600 800 @ 6 = 4800
200 @ 7 = 1400
200 @ 8 = 1600
16 200 @ 8 = 1600
200 @ 7 = 1400
800 @ 6 = 4800
24 300 @ 9 = 2700 800 @ 6 = 4800
300 @ 9 = 2700
27 300 @ 9 = 2700
200 @ 6 = 1200
600 @ 6 = 3600
Cost of material used = 6900
October 31 inventory = 3600
3)
Average Costing
Date Receipts Issue Balance
Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount
1 800 @ 6 = 4800
5 200 @ 7 = 1400 1000 @ 6.2 = 6200
9 200 @ 8 = 1600 1200 @ 6.5 = 7800
16 400 @ 6.5 = 2600 800 @ 6.5 = 5200
24 300 @ 9 = 2700 1100 @ 7.132 = 7900
27 500 @ 1.182 600 @ 7.182 = 4310
Cost of material used =6191 October 31 inventory=4310
4)
Market price at the date of issue
Opening Inventory
800 @ 6 = 4800
Purchases
200 @ 7 = 1400
200 @ 8 = 1600
300 @ 9 = 2700
5700
Issue
400 @ 8 = 2400
500 @ 9 = 4500
6900
E-5
a)
Material ledger card using average method
Date Receipts Issue Balance
Jan unit U.cost Bal unit U.cost Bal unit U.cost Bal
1 2000 @ 9.775=19550
6 1500 @ 10.300=15450 3500 @ 10 = 35000
7 1800 @ 10 = 18000 1700 @ 10 = 17000
26 3400 @10.750= 36550 5100 @ 10.5 = 19950
31 3200 @ 10.5 = 33600 1900 @ 10.5 = 53550
Cost of material used=51600
Closing inventory= 19950
b)
Cost of Material used
= No of units used × Average unit cost
= 5000 × 10
= 50,000 + (5000 × 0.3695)
= 50,000 + 184.8
= $ 51848
Ending inventory cost = 1900 × 10
= 19000
E-6
1)
Schedule of Dec 31, 19A Inventory: (LIFO Costing)
4000 @ 11.92 = 47680
8000 @ 12 = 96000
32000 @ 12.40 = 39680
15200 (total cost) = 18336
2)
$
Sales (47200 × 16) 755200
Less: C.G.S (FIFO) 580760
Gross profit 174440
Working:
No of units sold = 4000 + 58400 _ 15200
= 47200 units
C.G.S = Opening inventory + Purchases _ Closing inventory
= 47680 + 723936 _ 190856
= $ 580760
Closing inventory $
7200 @ 12.68 = 91296
6400 @ 12.80 = 81920
1400 @ 12.60 = 17640
15200 = 190856
E-7
Opening inventory
19A 19B 19C
LIFO: $80,000 $140,000 $60000
NOTE:
When closing inventory is reduced, cost of goods sold is increased, as a result of this, Gross profit also reduces and ultimately opening income will also reduce by exact amount as reduced in closing inventory and vice versa.
Operating Income
19A 19B 19C
$ $ $
FIFO: 20,000 60,000 20,000
Avg: 60,000 160,000 40,000
Material Controlling and Costing
Topic#2
Defected and spoiled production
Journal Entries
LOSS CHARGED TO JOB:
1) When work is startedW-I-P A/C Material A/C Payroll A/C FOH applied A/C
(Being cost of work started)
LOSS CHARGED TO ALL PRODUCTIO
SAME
2) When units become defected and rework is done:W-I-P A/C Material A/C Payroll A/C FOH applied A/C(Being cost of rework)
FOH A/C
Material A/C
Payroll A/C
FOH applied A/C
(Being cost of rework)
3) When units become spoiled:Spoiled work A/C (sale price) W-I-P A/C(Being cost of spoiled work)
Spoiled work A/C (sale price)
FOH A/C (actual loss)
W-I-P A/C (total loss)
(Being cost of spoiled work)
4) For completion of goods:Finished goods A/C W-I-P A/C(Being cost of work completed)
SAME
5) For sale of spoiled work:Cash A/C Spoiled work A/C(Being sale of spoiled work)
SAME
E-8
Req:1
Total amount of material available for sale (FIFO & LIFO)
= Opening inventory + Purchases
FIFO= (200×2) + (220×2.40)= 400 + 528= $ 928
LIFO= (200×2) + (220×2.40)= 400 + 528= $ 928
Working
Units purchased = units in ending inventory+units sold_units in opening inventory
FIFO= 240 + 180 _ 200= 220 units
LIFO= 240 + 180 _ 200= 220 units
2
Income statement
FIFO
$
Sales (180×3.60) 648
Less: Cost of goods sold (180×2) 360
Gross profit / Income before tax 288
Less: Income tax 50% (288×50/100) 144
Income after tax 144
LIFO
$
Sales (180×3.60) 648
Less: C.G.S (180×2.40) 432
Gross profit /Income before tax 216
Less: Income tax (216×50%) 108
Income after tax 108
3
Cost of ending inventory
FIFO
Units Unit cost Amount
$ $
20 2 40
220 2.40 528
Ending inventory 568
LIFO
Units Unit cost Amount
$ $
200 2 400
40 2.40 96
Ending inventory 469
FIFO
$
Sales (180×3.60) 648
Less: Purchases (220×2.40) 528
Income tax 144
Cash Balance (24)
LIFO
$
Sales 648
Less: Purchases 528
Income tax 108
Cash Balance 12
5
Both companies have 240 units in ending inventory @ 2.40 per unit; value $ 576.Cash position of the two firms is important. The LIFO Company has $ 12 in hand while FIFO Company with a high income has dipped into bank overdraft to pay its income tax.
E-9
Table
Items Original cost
Replacement cost
Floor Ceiling Market Lower of market or cost
$ $ $ $ $ $Delta o.67 o.62 o.6 0.68 0.62 o.62Sigma 2.20 2.12 2.02 2.1 2.1 2.1Beta 0.19 0.20 0.20 0.21 0.20 0.19N u 0.93 0.87 0.88 0.92 0.88 0.88
Ans
E-10
1) Cost of ending inventory(FIFO) $25 Units @ 87 = 2175
2) Cost of ending inventory (FIFO: COST OR MARKET, WHICH EVER IS LOWER) $25 Units @ 86 = 2150
3) Cost of ending inventory (Average costing) $
25 Units @ 84 = 2100
Avg unit cost = Total cost of material / Total units of material
= 8400 / 100
= $ 84 / units
4) Ending inventory cost (LIFO) $20 Units @ 80 = 16005 Units @ 82 = 410 2010
E-11
Table
Items Original cost
Replacement cost
Floor Ceiling Market Lower of market or cost
$ $ $ $ $ $Marker 12000 10400 11100 15600 11100 11100
Pens 9440 8400 11100 15600 11100 9440Highlighter 15000 15900 12800 14600 14600 14600
AnsWorkingNormal profitMarker = 18000 × 25 / 100 = $ 4500Pens = 18000 × 25 / 100 = $ 4500Highlighter = 18000 × 10 / 100 = $ 1800
E-12
Journal Entries
$ $
a) FOH A/C 115.5 Material A/C 115.5(Being material over cost)
Unit cost = 4200/8000 = $ 0.525
Units over cost = 8000 _ 7780
= 220 units
Value over cost = 220×0.525 = 115.5
b) FOH A/C 150 W-I-P A/C 150(Being prepaid charges to job 182)
c) Material A/C 382 W-I-P A/C 382(Being excess material returned from factory)
d) Account payable A/C 165 Material A/C 165(Being material returned to vendor)FOH A/C 14 Cash A/C 14(Being freight paid)
e) Sales returns A/C 2100 Account receivable 2100(Being sales returns)Finished goods A/C 1500 Cost of goods sold 1500(Being cost of goods sold returned)
f) FOH A/C 214.50W-I-P A/C 4600 Material A/C 4814.50(Being issue of material)
g) Material A/C 6150
Account payable A/C 6150(Being material purchased)Material A/C 70 Cash A/C 70(Being freight on purchase of material)
h) Material A/C 150 FOH A/C 150(Being material returned)
i) Scrap material A/C 200 Scrap sales A/C 200(Being spoiled work received in store)
j) Spoiled work A/C 20FOH A/C 40 W-I-P A/C 60(Being spoiled work received in store)
k) Cash A/C 250 Scrap material A/C 200 Scrap sales A/C 50(Being scrap material sold)E-12
Subsidiary recorda) Inventory adjustment A/C $ 115.5 Cr.b) Repair supplies A/C $ 150 Cr.c) ×d) Freight on purchase returns A/C $ 14 Cr.e) ×f) Supplies A/C $ 214.50 Cr.g) ×h) Supplies A/C $ 150 Dr.i) ×j) Loss on spoiled work $ 40 Cr.k) ×
Inventory valuation at cost or market, which ever is lower:Table
Items Original cost
Replacement cost
Floor Ceiling Market Lower of market or cost
$ $ $ $ $ $
Given Given Given Self calculation
Self calculation
Self Self
Floor = Sale price _ cost of completion and sale _ Normal profitCeiling= Sale price _ cost of completion and saleMarket= Replacement price within the range of Floor and ceiling
E-13
Req: 1
Loss charged to production
W-I-P A/C 60900
Material A/C 24000
Payroll A/C 18000
Applied FOH A/C 18900
(Being cost of work put into process)
(500×5) Spoiled work A/C 2500
FOH control A/C 2575
W-I-P A/C 5075
(Being cost of spoiled work)
Finished goods A/C 55825
W-I-P A/C 55825
(Being cost of work completed)
Cash A/C 2500
Spoiled work A/C 2500
(Being sale of spoiled work)
Working (Req1)
Total cost of loss
= 60900 / 6000 × 500
= $ 5075
Req:2
Loss charged to job
W-I-P A/C 60000
Material A/C 24000
Payroll A/C 18000
(18000×100/100)Applied FOH A/C 18000
(Being cost of work put into process)
Spoiled work A/C 2500
W-I-P A/C 2500
(Being cost of spoiled work)
Finished goods A/C 57500
W-I-P A/C 57500
(Being cost of work completed)
Cash A/C 2500
Spoiled work A/C 2500
(Being sale of spoiled work)
E-14
1) Loss charged to all production W-I-P A/C 50,000 (4000×5) Material A/C 20,000 (4000×4) Payroll A/C 16,000 (4000×3.50) FOH applied A/C 14,000(Being cost of work put into process)Spoiled work A/C 2100FOH control A/C 1650 W-I-P A/C 3750(Being cost of spoiled work)Finished goods A/C 46250 W-I-P A/C 46,250(Being cost of goods completed)Cash A/C 2100 Spoiled work A/C 2100(Being sale of spoiled work)WorkingTotal cost of loss= W-I-P started / Total units started × Units lost= 50,000 / 4000 × 300= $ 3750Sale price of spoiled work = units spoiled × sale price = 300 × 7= $ 2100
2) Loss charged to production run (job) W-I-P A/C 48,000 (4000×5) Material A/C 20,000 (4000×4) Payroll A/C 16,000 (4000×3) FOH applied A/C 12,000(Being cost of work started)Spoiled work A/C 2100 (300×7) W-I-P A/C 2100(Being cost of spoiled work)Finished goods A/C 45900 W-I-P A/C 45900(Being cost of goods completed)
Cash A/C 2100
Spoiled work A/C 2100(Being sale of spoiled work)
E-15
1) Loss is charged to job:
W-I-P A/C 88000
(1000×40)Material A/C 40000
(1000 ×20)Payroll A/C 20000
(20000×140/100)Applied FOH A/C 28000
(Being cost of work put into process)
W-I-P A/C 11600
(1000×2)Material A/C 2000
(1000 ×4)Payroll A/C 4000
(4000×140/100)Applied FOH A/C 5600
(Being cost of rework)
Finished goods A/C 99600
W-I-P A/C 99600
(Being cost of work completed)
Req(2)
Loss charged to entire production:
W-I-P A/C 63000
(1000×40)Material A/C 40000
(1000 ×20)Payroll A/C 20000
(20000×150/100)Applied FOH A/C 3000
(Being cost of work put into process)
W-I-P A/C 12000
(1000×2)Material A/C 2000
(1000 ×4)Payroll A/C 4000
(4000×150/100)Applied FOH A/C 6000
(Being cost of rework)
Finished goods A/C 63000
W-I-P A/C 63000
(Being cost of work completed)
Problems
7-1
a) Applied acquisition cost rate= Estimated acquisition cost/Estimated purchases×100= 18000 / 144000 × 100= 12.5%
b) Applied cost = Actual purchases × Applied cost rate= 148500 × 12.5 / 100= $ 18562.5
c) The actual cost of material is under cost, therefore the under applied cost of $ 362.5 (18562.5 – 18200) should be closed to cost of goods sold.
7-2
FIFO Costing
Date Receipts Issue Balance
June unit U.cost Bal unit U.cost Bal unit U.cost Bal
1 200 @ 3 = 600
2 500 @ 3.20 = 1600 200 @ 3 = 600
500 @ 3.20 = 1600
7 200 @ 3 = 600
200 @ 3.20 = 640
300 @ 3.20 = 960
11 300 @ 3.30 = 990 300 @ 3.20 = 960
300 @ 3.30 = 990
14 300 @ 3.20 = 960
100 @ 3.30 = 330
200 @ 3.30 = 660
17 400 @ 3.20 = 1280 200 @ 3.30 = 660
400 @ 3.20 = 1280
21 200 @ 3.30 = 660 400 @ 3.20 = 1280
24 300 @ 3.40 = 1020 400 @ 3.20 = 1280
300 @ 3.40 = 1020
26 400 @ 3.50 = 1400 400 @ 3.20 = 1280
300 @ 3.40 = 1020
400 @ 3.50 = 1400
29 400 @ 3.20 = 1280
200 @ 3.40 = 680
Cost of material used = 5150
Closing stock = 1740
LIFO Costing
Date Receipts Issue Balance
June unit U.cost Bal unit U.cost Bal unit U.cost Bal
1 200 @ 3 = 600
2 500 @ 3.20 = 1600 200 @ 3 = 600
500 @ 3.20 = 1600
7 400 @ 3.20 = 1280 200 @ 3 = 600
100 @ 3.20 = 320
11 300 @ 3.30 = 990 200 @ 3 = 600
100 @ 3.20 = 320
300 @ 3.30 = 990
14 300 @ 3.30 = 990
100 @ 3.20 = 320
200 @ 3 = 600
17 400 @ 3.20 = 1280 200 @ 3 = 600
400 @ 3.20 = 1280
21 200 @ 3.20 = 640 200 @ 3 = 600
200 @ 3.20 = 640
24 300 @ 3.40 = 1020 200 @ 3 = 600
200 @ 3.20 = 640
300 @ 3.40 = 1020
26 400 @ 3.50 = 1400 200 @ 3 = 600
200 @ 3.20 = 640
300 @ 3.40 = 1020
400 @ 3.50 = 1400
29 400 @ 3.50 = 1400
200 @ 3.40 = 680
200 @ 3 = 600
200 @ 3.20 = 640
100 @ 3.50 = 340
Cost of material used = 5310
Closing inventory = 1580
Income statement (FIFO)
$
Sales (1600@7) 11200
Less: Cost of goods sold 5150
Gross income 6050
Less: Marketing & Administrative expenses 2100
Income before tax 3950
Less: Income tax (40%) 1580
Net income 2370
Income statement (LIFO)
$
Sales (1600@7) 11200
Less: Cost of goods sold 5310
Gross income 5890
Less: Marketing & Administrative expenses 2100
Income before tax 3790
Less: Income tax (40%) 1516
Net income 2274
Cash position at the end of June
FIFO
$
Sales (1600 × 7) 11200
Less:
Purchases 6290
Marketing & Administrative expenses 2100
Income tax 1580
Cash balance 1230
LIFO
$
Sales (1600 × 7) 11200
Less:
Purchases 6290
Marketing & Administrative expenses 2100
Income tax 1516
Cash balance 1294
7-3
Cost of ending inventory (produced with FIFO)
100 @ 12 = 1200
100 @ 14 = 1400
200 @ 17 = 3400
400 6000
Working:
No of units in ending inventory
= Opening units + Purchases _ Sold units
= 200 + 600 _ 400
= 200 units
LIFO Costing
Date Receipts Issue Balance
unit U.cost Bal unit U.cost Bal unit U.cost Bal
Jan 1 200 @ 10 = 2000
Jan12 100 @ 11 = 1100 200 @ 10 = 2000
100 @ 11 = 1100
Feb 1 100 @ 11 = 1100
100 @ 10 = 1000
100 @ 10 = 1000
Apr16 200 @ 12 = 2400 100 @ 10 = 1000
200 @ 12 = 2400
May1 100 @ 12 = 1200 100 @ 10 = 1000
100 @ 12 = 1200
July15 100 @ 14 = 1400 100 @ 10 = 1000
100 @ 12 = 1200
100 @ 14 = 1400
Nov10 100 @ 14 = 1400 100 @ 10 = 1000
100 @ 12 = 1200
Dec5 200 @ 17 = 3400 100 @ 10 = 1000
100 @ 12 = 1200
200 @ 17 = 3400
Cost of material used=4700 Ending inventory=5600
Cost of ending inventory
100 @ 10 = 1000
100 @ 12 = 1200
200 @ 17 = 3400
5600
7-4 ????
7-5
(1) LIFO: Periodic Inventory
Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 8,000 @ 16 = 128,000 12,000 @ 22 = 264,000
Total 56,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $678,000 = $314,000
Cost of goods sold = $128,000 + 240,000 + 240,000 + (7,000 x 10)
= $678,000
(2)
Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 4,000 @ 16 = 64,000 12,000 @ 22 = 264,000
Total 52,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $632,000 = $360,000
Cost of goods sold = $64,000 + 240,000 + 240,000 + 80,000 + (1,000 x 8)
= $632,000
(3)
Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 12,000 @ 16 = 192,000 12,000 @ 22 = 264,000
Total 60,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $702,000 = $290,000
Cost of goods sold = $192,000 + 240,000 + 240,000 + (3,000 x 10)
= $702,000
(4)
FIFO: Periodic Inventory
(1) Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 8,000 @ 16 = 128,000 12,000 @ 22 = 264,000
Total 56,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $640,000 = $352,000
Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)
= $640,000
(2)
Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 4,000 @ 16 = 64,000 12,000 @ 22 = 264,000
Total 52,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $640,000 = $352,000
Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)
= $640,000
(3)
Inventory January 1 4,000 @ $8 = $32,000
Purchases: Sales
First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000
Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000
Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000
Fourth Quarter 12,000 @ 16 = 192,000 12,000 @ 22 = 264,000
Total 60,000 51,000 $992,000
Gross Profit = Sales – cost of goods sold
= $992,000 – $640,000 = $352,000
Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)
= $640,000
7-6
(1) Instant Coffee
October 1 inventory 1,200 cases
October 10 purchase 1,600
October 20 purchase 1,600
Available for sale 4,400
Less: net sales (3,400 – 50) 3,350
October 31 inventory 1,050 cases
Purchase price per case $57
Less: cash discount 2% 1.14
Net purchase price $55.86
Add: freight ($480/1,600) 0.30
Cost per case $56.16
Sugar
October 1 inventory 600 balers
October 5 purchase 640
October 16 purchase 640
Less: Damaged Goods (20)
October 24 purchase 640
Available for sale 2,500
Less: net sales 2,200
October 31 inventory 300 balers
Purchase price per baler $5.04
Less: freight ($320/640) 0.50
Cost per baler $5.54
(2) Instant Coffee Sugar
Replacement cost
Most recent quoted price $56.65 per case $5.30 per baler
2% cash discount 1.13 -----
$55.52 $5.30
Freight 0.30 0.50
$55.82 $5.80
Ceiling – net realizable value $60.80 $5.20
Floor – net realizable value less normal markup 53.20 4.55
Market 55.82 5.20
Cost (req. 1) 56.16 5.54
Lower of cost or market 55.82 5.20*
Total inventory October 31:
Instant coffee (1,050 x $55.82) $58,611
Sugar (300 x $5.20) 1,560
$60,171
*net realizable value (ceiling) must be used for market because actual market (replacement cost) exceeds the upper limit under the cost or market rule. Even though replacement cost exceeds cost, cost may not be used because the upper market limit is lower than cost.
(3) The lower of cost or market procedure may be applied to each inventory items, or it may be applied to groups of product or to the inventory as a whole. However, the procedure selected should be consistently from period to period and the mix within a group or total inventory should not change erratically from period to period, so that inventory value is not distorted by mix changes.
7-7
Loss charged to job Loss charged to all productionW-I-P A/C 90400(8000×5)Material A/C 40,000(8000×4)Payroll A/C 32000(8000×2.30)FOH applied A/C 18400(Being cost of work put into process)
W-I-P A/C 96000(8000×5)Material A/C 40,000(8000×4)Payroll A/C 32000(8000×3)FOH applied A/C 24000(Being cost of work put into process)
Spoiled work A/C 2400(600×4) W-I-P A/C 2400(Being cost of spoiled work)
Spoiled work A/C 2400FOH control A/C 4800 W-I-P A/C 7200(Being cost of spoiled work)Working:Total cost of loss= 96000 / 8000 × 600 = 7200Sale price of spoiled units= 600 × 4 = 2400
Finished goods A/C 88000 W-I-P A/C 88000(Being cost of work completed)
Cash A/C 2400 Spoiled work A/C 2400(Being sale of spoiled work) Finished goods A/C 88000
W-I-P A/C 88000(Being cost of work completed)
Cash A/C 2400 Spoiled work A/C 2400(Being sale of spoiled work)
7-8
1) Loss charged to job W-I-P A/C 8375(1000×4) Material A/C 4000(1000×1.75) Payroll A/C 1750(1750×150/100)FOH applied A/C 2625(Being cost of work put into process)
W-I-P A/C 71.25(75×0.20) Material A/C 15(75×0.30) Payroll A/C 22.5(22.5×150/100)FOH applied A/C 33.75
(Being cost of work put into process) Finished goods A/C 8446.25 W-I-P A/C 8446.25
(Being cost of goods completed)
2) Loss charged to all production W-I-P A/C 8550(1000×4) Material A/C 4000(1000×1.75) Payroll A/C 1750(1750×160/100)FOH applied A/C 2800(Being cost of work put into process)
W-I-P A/C 73.5(75×0.20) Material A/C 15(75×0.30) Payroll A/C 22.5(22.5×160/100)FOH applied A/C 36(Being cost of work put into process) Finished goods A/C 8550 W-I-P A/C 8550(Being cost of goods completed)
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