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SEMESTERSPRING 2014
FINANCIAL ACCOUNTING-II (MGT401)
ASSIGNMENT NO. 01
DUE DATE: May 26, 2014
MARKS: 10

Learning Objectives
To give the students in depth knowledge of valuation of inventories and to make them
realize that difference arises in books of accounts due to selection of different
inventory valuation method.

Learning Outcomes
Students will be able to get comprehensive knowledge about inventory valuation
methods; FIFO and weighted average method.

Case
GEAR-UP Pvt. Ltd is a leading motorcycle spare parts manufacturer in Pakistan. Prices of auto
spare parts have been changing from previous four years drastically, due to inflation prevails in
the country thus the prices of spare parts are considered volatile. As per rule of IAS -2 there are
two methods available one is ‘FIFO’ (first-in, first-out) and second is ‘weighted-average cost
method’ to measure the cost of inventory. In and out record of product “SP001” has been
extracted form books of GEAR-UP Pvt. Ltd as on December 31, 2013 is as follows:


Details of “SP001” received and issued as on December, 31 2013
Date Description Per unit in Rs.
Dec.1st
Received 200 units 130
Dec.8th Received 300 units 150
Dec.22nd Received 100 units 200
Dec.10th Sold 150 units
Dec.30th Sold 80 units

REQUIREMENTS:
Calculate the cost of inventory under FIFO and weighted average method. (05Marks)
Calculate Gross profit under both methods if selling price of SP001 is Rs.250 per unit. (03Marks)
Give the reason of difference in profit under both methods, which method results in higher tax
burden and why? (02Marks)

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Replies to This Discussion

Arslan Muzaffar  

                                                Mc 130200835

 

 

 

 

 

 

 

Solution:

 

 

 

 

 

FIFO Method

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

Received

Issued

Balance

 

 

 

 

Units

Cost

Amount

Units

Cost

Amount

Units

Cost

Amount

 

 

 

1-Dec

200

130

26000

 

 

 

200

130

26000

 

 

 

8-Dec

300

150

45000

 

 

 

200

130

26000

 

 

 

 

 

 

 

 

 

 

300

150

45000

 

 

 

10-Dec

 

 

 

150

130

19500

50

130

6500

 

 

 

 

 

 

 

 

 

 

300

150

45000

 

 

 

22-Dec

100

200

20000

 

 

 

50

130

6500

 

 

 

 

 

 

 

 

 

 

300

150

45000

 

 

 

 

 

 

 

 

 

 

100

200

20000

 

 

 

30-Dec

 

 

 

50

130

6500

270

150

40500

 

 

 

 

 

 

 

30

150

4500

100

200

20000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Method

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date

Received

Issued

Balance

 

 

 

 

Units

Cost

Amount

Units

Cost

Amount

Units

Cost

Amount

 

 

 

1-Dec

200

130

26000

 

 

 

200

130

26000

 

 

 

2-Dec

300

150

45000

 

 

 

500

142

71000

 

 

 

10-Dec

 

 

 

150

142

21300

350

142

49700

 

 

 

22-Dec

100

200

20000

 

 

 

450

154.89

69700.5

 

 

 

30-Dec

 

 

 

80

154.89

12391.2

370

154.89

57309.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part B

 

 To calculate Gross profit under FIFO Method:

 

Unit Sold=150+80=230

Sale Price= 230×250= 57,500

Cost= 19,500+4,500+6500=30500

As we know that the formula of Gross profit is

Gross Profit = Sales – Cgs

Gross profit =57500-30500

Gross Profit =27000


To calculate gross Profit under weighted Average Method:

 

Units Sold = 150+180 =230

Sale price =230 x 250 = 57500
 Cost =21300+12391.2=33691.2

As we know the formula of Gross profit

Gross profit = Sales – Cgs

Gross profit = 57500-33691.2

Gross Profit = 23808.8

 

 

Part b

 

FIFO method will result in Higher Tax because material purchased for the first time would be in stock and the price would be higher than the opening stock. 

 

 

 

The Weighted Average Cost Method

This method assumes that we sell all our inventories simultaneous

The weighted average cost method is most commonly used in manufacturing businesses where inventories are piled or mixed together and cannot be differentiated, such as chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those bought yesterday, as they are all mixed together.

So we work out an average cost for all chemicals that we have in our possession. The method specifically involves working out an average cost per unit at each point in time after a purchase.

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