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Graded Discussion Board
Cost and Management Accounting (MGT402)
This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on November 30, 2013 for discussion and last date for posting your discussion will be December 04, 2013.
Topic/Area for Discussion
This Graded Discussion Board will cover first 14 lessons.
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To enable students to get comprehensive knowledge of material costing techniques.
Mr. Assad natively belongs to remote area of Punjab. After passing his matriculation he couldn’t carry on his studies and came to Lahore for job hunting. After tireless effort, he could not seek job owing to crises prevailing in the country and adverse economic conditions. Due to getting dishearten, he finally decided to start a juice corner to sell sugarcane extract. He started this business at a small level but, within a shorter period of time, he has reached at the climax of success and now operating this business at large scale under the corporate name of Hygienic plus (Pvt.) Limited. He also has established a well-defined accounting system in his company.
Hygienic plus (PVT) Ltd. is an energy drink being sold at Punjab level in tin packs. Hygienic plus (PVT) Ltd. Uses sugarcane purchased in the near past. Recently, due to heavy floods in the sugarcane growing areas, prices of sugarcane has been risen to an unpleasant level. He is unable to select the costing method of sugarcane inventories while preparing cost of goods sold and determining unsold inventories at the year end.
Which costing method of inventories might result in less cost of goods manufactured and sold in financial statement of Hygienic plus (PVT) Ltd.? Support you answer with logical arguments.
Any one Help......
Sbp Bsc bs b kro teeth tot jaien gy
Angel g thora khyal rakhna her dant doodh ka nahi hot k toot jayen, eysa na ho k iska ulta asar ap pe par jaye.
Inventory costing methods
1. First In First Out (FIFO)
2. Last In First Out (LIFO)
3. Weighted Average (W.Avg)
First in First out (FIFO):
This method assumes that the goods firstly received in the stores or produced firstly are the first ones to be delivered to the requisitioning department.
For example a bakery produces 200 loaves of bread on 1st of January at a cost of Re.1 each, and 200 more on 2nd. at Rs. 1.25 each. FIFO states that if the bakery sold 100 loaves on 3rd., the cost of consumption is Re.1 per loaf (recorded on the income statement) because that was the cost of each of the first loaves in inventory. The 100 at Re. 1 and 200 at Rs.1.25 loaves would be allocated to ending inventory (appears on the balance sheet).
• FIFO gives us a better indication of the value of ending inventory (on the balance sheet)
• It also increases net income because inventory that might be several years old is used to value the cost of goods sold.
• Increasing net income sounds good, but do remember that it also has the potential to increase the amount of taxes that a company must pay.
1) It is the method that most people feel logically as correct since it assumes that the stock issues are made in the order in which they are received.
2) Issue prices are based on the prices actually paid for the stock.
3) It is an acceptable method for the purposes of financial reporting.
1) FIFO complicates stock records as issues have to be analyzed by delivery.
2) Issues from stock are not recorded at the most recent prices paid. This could influence costing of work done and may ultimately affect the revenue.
janab itna bara answer
Last In First Out (LIFO):
This method assumes that the goods received most recently in the stores or produced recently are the first ones to be delivered to the requisitioning department.
The older inventory, therefore, is left over at the end of the accounting period.
For the 200 loaves sold on 3rd. January, the same bakery would assign Rs. 1.25 per loaf to cost of consumption while the remaining 200 at Re.1 and 100 at Rs.1.25 loaves would be used to calculate the value of inventory at the end of the period.
• LIFO is not a good indicator of ending inventory value because the left over inventory might be extremely old and, perhaps, obsolete.
• LIFO results in a valuation that is much lower than today's prices. LIFO results in lower net income because cost of goods sold is higher.
Weighted Average Method (W.Avg):
This method recalculates the average cost of inventory held each time a new delivery is received. Issues are then recorded at this weighted average price.
It takes the weighted average of all units available for sale during the accounting period. The formula to calculate the weighted average rate is:
Total Cost = weighted average rate per unit
Weighted Average cost is used to determine the value of cost of consumption and ending inventory.
In our bakery example, the weighted average cost for inventory would be Rs. 1.125 per unit, calculated as [(200 x Rs. 1) + (200 x Rs. 1.25)]
• Weighted Average cost produces results that fall somewhere between FIFO and LIFO.
Friends, read lesson 7 of the handout for better understanding.
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