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Topic to be tested:

  • Costing in manufacturing business and valuation of stock

 

Learning Objectives:

  • To understand the concepts used in the preparation of cost of goods sold statement and valuation of stock

 

DISCUSSION SCENARIO:

Home Comforts is dealing in the manufacturing of wood products since last two decade in more than 5 cities of Pakistan. The company uses First in First out (FIFO) method for costing its raw materials. On 1st January 2015, the stocks of raw material, work in process and finished goods were Rs. 20,000, Rs. 8,000 and Rs. 3,000 respectively. During the year, material was purchased on 10th January and 15thJuly at Rs. 100,000 and Rs. 60,000 respectively with total freight inward of Rs. 1,000. Direct Labor cost was Rs. 50,000 and marketing manager salary was of Rs. 70,000 while conversion cost was recorded as Rs. 80,000.

At the year end, no inventories were found in hand except work in process which was twice of the balance as on 31st December 2014.

 

Required:

  1. Calculate the following:
    1. Cost of material consumed
    2. Total factory cost
    3. Factory overhead cost
  2. Describe the impact on total factory cost determined by the Home Comforts if we use Last in First out (LIFO) method.

Views: 3446

Replies to This Discussion

anyone solve it properly....???

actually hamen bataya hua ha k company is using FIFO method ,,,1st part k  solution ka FIFO se koi concern  nhe hai.. then 1st part k answers ko dekhte hue hamen yeh batana hai 2nd part men k agar company LIFO method use kerty tuh factory cost pe kia impact perta..

Thanks apne question dobara bata dia :-) ye sub ko pata hai impact kia hoga ye pata karna hai janab,,,,

The FIFO and LIFO method is used when the raw material is purchased at several different costs, the inventory (stock) will have several different unit prices. In this GDB no different unit prices are mentioned. So there is no impact of FIFO and LIFO.

gud abdul ghaffar u r absolutely right

Helping Points for second part of gdb

  • LIFO recovers cost from production because actual cost of material is charged to production.
  • Production is charged at the recent prices because materials are issued from the latest consignment. Therefore, the effect of current market prices of materials is reflected in the cost of sales if the materials are recently purchased.
  • In times of rising prices (inflation), LIFO is suitable because materials are issued at current market prices (which are high). This method helps in showing a lower profit because of increased charge to production during periods of rising prices and reduces income tax.

(Inflation)

FIFO: (+) Higher value of inventory (-) Lower cost of goods sold

LIFO: (-) Lower value of inventory (+) Higher cost of goods sold

(Deflation)

FIFO: (-) Lower value of inventory (+) Higher cost of goods sold

LIFO: (+) Higher value on inventory (-) Lower cost on goods sold



Please Discuss here about this GDB.Thanks

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