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Managing Cost and Finance MA2

Ibrahim Hameem(CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)

Free Inventory

There are currently 120 units of an item in inventory. There are material requisitions amounting to 40 units that have not yet been acted on and there are 90 units on order. What is the free inventory?A! 70 B! 170

C! 120

D! 250

ACCA - Managing Cost and Finance

Different methods used to price materials issued from inventory and to value closing inventory

Consider the following: 12 March 20X4: buy 1000 units at $5 each 21 March 20X4: buy 500 units at $6 each 31 March 20x4: sell 800 units at $12 each. Clearly revenue will be 800 x $12 = $9,600

But what is the cost of the units sold? Which have been sold? What is their value and the value of the inventory left?

ACCA - Managing Cost and Finance

Methods

You have to know four approaches: • FIFO • LIFO

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Cumulative weighted average

•

Periodic weighted average

ACCA - Managing Cost and Finance

Question 01

When goods are received, what is the name given to the document that is raised (created) at that stage.A! Delivery note B! Purchase requisition C! Goods received note

D! Purchase invoice

ACCA - Managing Cost and Finance

FIFO

This method assumes that the goods that arrive first are the first to be used. It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used. So, in the above case, all 800 units sold would be assumed to be those delivered on 12 March. They would have a cost of 800 x $5 = $4,000 and the value of the inventory remaining would be

200 x $5 + 500 x $6 = $4,000.

Note that receipts and sales are handled on a strict time basis.

ACCA - Managing Cost and Finance

LIFO

LIFO (Last-in, first out) This method assumes that the goods that arrive last are the first to be used. As before It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used. So, in the above case, the 800 units sold would be assumed to be all 500 of those delivered on 21 March plus 300 from the March 12 delivery. They would have a cost of 500 x $6 plus 300 x $5 = $4,500, and the value of the inventory remaining would be 700 x $5 = $3,500.

Note that receipts and sales are handled on a strict time basis.

ACCA - Managing Cost and Finance

Question 02

Will LIFO and FIFO result in two separate closing stock values during times of inflation or deflation? Yes

ACCA - Managing Cost and Finance

Advantages

Disadvantages FIFO Permitted by accounting standards as an acceptable approach to inventory valuation

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Closing inventory has a value close to its replacement value

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Might reflect physical use of stock

• Requires care to get it rightLIFO

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Inventory is issued at close to its current cost (significant if there is high inflation of volatile stock prices)

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Might reflect physical use of stock

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Not permitted as a stock valuation method under financial reporting standards

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Requires care to get it right

ACCA - Managing Cost and Finance

Question 03

Which method of stock valuation results in a higher profit during times of inflation?FIFO method

ACCA - Managing Cost and Finance

Managing Cost and Finance MA2

Ibrahim Hameem(CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)