Determining Inventory Costs
Value of inventory under FIFO method:
|
Inventory account- FIFO method |
|||||||||
|
Date |
Particulars |
Units |
Rate |
Amount |
Date |
Particulars |
Units |
Rate |
Amount |
|
01-Jun |
Balance b/d |
200 |
5 |
1000 |
30-Jun |
Sales |
120 |
5 |
600 |
|
25-Aug |
Purchases |
300 |
5.25 |
1575 |
30-Aug |
Sales |
80 |
5 |
400 |
|
03-Sep |
Purchases |
450 |
5.3 |
2385 |
Sales |
170 |
5.25 |
892.5 |
|
|
05-Oct |
Purchases |
300 |
5.4 |
1620 |
10-Sep |
Purchase Returns |
50 |
5.3 |
265 |
|
08-Dec |
Purchases |
250 |
5.45 |
1362.5 |
30-Sep |
Sales |
130 |
5.25 |
682.5 |
|
21-Feb |
Purchases |
150 |
5.5 |
825 |
Sales |
170 |
5.3 |
901 |
|
|
18-Mar |
Purchases |
100 |
5.6 |
560 |
11-Dec |
Sales |
230 |
5.3 |
1219 |
|
02-May |
Sales Return |
10 |
5.45 |
54.5 |
Sales |
270 |
5.4 |
1458 |
|
|
02-May |
Sales Return |
20 |
5.5 |
110 |
30-Apr |
Sales |
30 |
5.4 |
162 |
|
04-May |
Purchases |
250 |
5.7 |
1425 |
Sales |
250 |
5.45 |
1362.5 |
|
|
06-Jun |
Purchases |
300 |
5.85 |
1755 |
Sales |
20 |
5.5 |
110 |
|
|
30-Jun |
Sales |
10 |
5.45 |
54.5 |
|||||
|
Sales |
150 |
5.5 |
825 |
||||||
|
Sales |
100 |
5.6 |
560 |
||||||
|
Sales |
200 |
5.7 |
1140 |
||||||
|
Balance c/d |
50 |
5.7 |
285 |
||||||
|
Balance c/d |
300 |
5.85 |
1755 |
||||||
|
12672 |
12672 |
Therefore value of closing inventory under FIFO system will be $2040.
Value of inventory under moving average method:
|
Inventory account- Moving Average |
|||||||||
|
Date |
Particulars |
Units |
Rate |
Amount |
Date |
Particulars |
Units |
Rate |
Amount |
|
01-Jul |
Balance b/d |
200 |
5.00 |
1,000.00 |
30-Jun |
Cost of Sales |
120 |
5.00 |
600.00 |
|
25-Aug |
Purchases |
300 |
5.25 |
1,575.00 |
30-Aug |
Cost of Sales |
250 |
5.20 |
1,299.34 |
|
03-Sep |
Purchases |
450 |
5.30 |
2,385.00 |
10-Sep |
Purchase Returns |
50 |
5.30 |
265.00 |
|
05-Oct |
Purchases |
300 |
5.40 |
1,620.00 |
30-Sep |
Cost of Sales |
300 |
5.27 |
1,582.45 |
|
08-Dec |
Purchases |
250 |
5.45 |
1,362.50 |
11-Dec |
Cost of Sales |
500 |
5.38 |
2,689.56 |
|
21-Feb |
Purchases |
150 |
5.50 |
825.00 |
30-Apr |
Cost of Sales |
300 |
5.46 |
1,636.50 |
|
18-Mar |
Purchases |
100 |
5.60 |
560.00 |
30-Jun |
Cost of Sales |
460 |
5.68 |
2,611.38 |
|
02-May |
Sales Return |
30 |
5.46 |
163.65 |
30-Jun |
Balance c/d |
350 |
5.68 |
1,986.92 |
|
04-May |
Purchases |
250 |
5.70 |
1,425.00 |
|||||
|
06-Jun |
Purchases |
300 |
5.85 |
1,755.00 |
|||||
|
12,671.15 |
12,671.15 |
Therefore value of closing inventory under moving average system will be $1986.92.
Part B:
Following will the journal passed in order to record the abnormal loss of 50 units under FIFO system:
|
Abnormal Loss a/c …..dr |
285 |
|
To Inventory Control a/c |
285 |
|
(Being loss of inventory items recorded) |
Following will the journal passed in order to record the abnormal loss of 50 units under moving average system:
|
Abnormal Loss a/c …..dr |
283.85 |
|
To Inventory Control a/c |
283.85 |
|
(Being loss of inventory items recorded) |
Part C:
Using the moving average system the following have been made:
|
Inventory account- Moving Average |
|||||||||
|
Date |
Particulars |
Units |
Rate |
Amount |
Date |
Particulars |
Units |
Rate |
Amount |
|
01-Jul |
Balance b/d |
200 |
5.00 |
1,000.00 |
30-Jun |
Cost of Sales |
120 |
5.00 |
600.00 |
|
25-Aug |
Purchases |
300 |
5.25 |
1,575.00 |
30-Aug |
Cost of Sales |
250 |
5.20 |
1,299.34 |
|
03-Sep |
Purchases |
450 |
5.30 |
2,385.00 |
10-Sep |
Purchase Returns |
50 |
5.30 |
265.00 |
|
05-Oct |
Purchases |
300 |
5.40 |
1,620.00 |
30-Sep |
Cost of Sales |
300 |
5.27 |
1,582.45 |
|
08-Dec |
Purchases |
250 |
5.45 |
1,362.50 |
11-Dec |
Cost of Sales |
500 |
5.38 |
2,689.56 |
|
21-Feb |
Purchases |
150 |
5.50 |
825.00 |
30-Apr |
Cost of Sales |
300 |
5.46 |
1,636.50 |
|
18-Mar |
Purchases |
100 |
5.60 |
560.00 |
30-Jun |
Cost of Sales |
460 |
5.68 |
2,611.38 |
|
02-May |
Sales Return |
30 |
5.46 |
163.65 |
30-Jun |
Abnormal loss |
50 |
5.68 |
283.85 |
|
04-May |
Purchases |
250 |
5.70 |
1,425.00 |
Balance c/d |
300 |
5.68 |
1,703.07 |
|
|
06-Jun |
Purchases |
300 |
5.85 |
1,755.00 |
|||||
|
12,671.15 |
12,671.15 |
|
Cost of Sales |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
01-Jul |
Inventory control |
600.00 |
30-Jun |
Sales |
10,419.23 |
|
30-Aug |
Inventory control |
1,299.34 |
|||
|
30-Sep |
Inventory control |
1,582.45 |
|||
|
11-Dec |
Inventory control |
2,689.56 |
|||
|
30-Apr |
Inventory control |
1,636.50 |
|||
|
30-Jun |
Inventory control |
2,611.38 |
|||
|
10,419.23 |
10,419.23 |
|
Sales |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
01-Jul |
Cost of Sales |
10,419.23 |
01-Jul |
Cash |
1,080.00 |
|
30-Jun |
Profit and loss |
5,150.77 |
30-Aug |
Cash |
450.00 |
|
30-Sep |
Cash |
2,700.00 |
|||
|
11-Dec |
Cash |
4,500.00 |
|||
|
30-Apr |
Cash |
2,700.00 |
|||
|
30-Jun |
Cash |
4,140.00 |
|||
|
15,570.00 |
15,570.00 |
2.Part A:
Calculation of depreciation under:
Straight line method:
|
Calculation of Depreciation- Straight Line Method |
|||
|
Year ending 30 June |
Annual Depreciation Expense |
Accumulated depreciation |
Carrying Amount at the end of the year |
|
2014 |
220000 |
220000 |
980000 |
|
2015 |
220000 |
440000 |
760000 |
|
2016 |
220000 |
660000 |
540000 |
|
2017 |
220000 |
880000 |
320000 |
|
2018 |
220000 |
1100000 |
100000 |
|
Depreciation calculation |
|||
|
Purchase price – salvage value |
= |
1200000-100000 |
|
|
Life of the asset |
5 |
||
|
= |
1100000 |
||
|
5 |
|||
|
= |
220000 |
Diminishing Balance method:
|
Calculation of Depreciation- Diminishing Balance |
|||
|
Year ending 30 June |
Annual Depreciation Expense |
Accumulated depreciation |
Carrying Amount at the end of the year |
|
2014 |
4,69,963 |
4,69,963 |
7,30,037.21 |
|
2015 |
2,85,909 |
7,55,871 |
4,44,128.61 |
|
2016 |
1,73,937 |
9,29,808 |
2,70,192.01 |
|
2017 |
1,05,817 |
10,35,625 |
1,64,375.18 |
|
2018 |
64,375 |
11,00,000 |
1,00,000.00 |
|
Depreciation rate per year |
= |
1-(Estimated Scrap/Original Value)^(1/Life of the asset) |
|
= |
1-(100000/1200000)^(1/5) |
|
|
= |
39.16 |
Sum-of-year Digits method:
|
Calculation of Depreciation- Sum of digits method |
|||
|
Year ending 30 June |
Annual Depreciation Expense |
Accumulated depreciation |
Carrying Amount at the end of the year |
|
2014 |
3,66,667 |
3,66,667 |
8,33,333.33 |
|
2015 |
2,93,333 |
6,60,000 |
5,40,000.00 |
|
2016 |
2,20,000 |
8,80,000 |
3,20,000.00 |
|
2017 |
1,46,667 |
10,26,667 |
1,73,333.33 |
|
2018 |
73,333 |
11,00,000 |
1,00,000.00 |
|
Year |
Number of years of life |
Ratio |
Depreciation |
|
1 |
5 |
0.33333333 |
3,66,667 |
|
2 |
4 |
0.26666667 |
2,93,333 |
|
3 |
3 |
0.20000000 |
2,20,000 |
|
4 |
2 |
0.13333333 |
1,46,667 |
|
5 |
1 |
0.06666667 |
73,333 |
|
Total |
15 |
Units of production method:
|
Calculation of Depreciation- Units of Production |
|||
|
Year ending 30 June |
Annual Depreciation Expense |
Accumulated depreciation |
Carrying Amount at the end of the year |
|
2014 |
2,05,224 |
2,05,224 |
9,94,776 |
|
2015 |
1,84,701 |
3,89,925 |
8,10,075 |
|
2016 |
2,25,746 |
6,15,672 |
5,84,328 |
|
2017 |
2,38,060 |
8,53,731 |
3,46,269 |
|
2018 |
2,46,269 |
11,00,000 |
1,00,000 |
|
Depreciation |
= |
Number of units produced*(cost-Salvage) |
|
Life in terms of units |
|
Year |
Number of units |
Depreciation |
|
1 |
50000 |
2,05,223.88 |
|
2 |
45000 |
1,84,701.49 |
|
3 |
55000 |
2,25,746.27 |
|
4 |
58000 |
2,38,059.70 |
|
5 |
60000 |
2,46,268.66 |
|
268000 |
Part B:
Depreciation refers to the reduction in value of the asset due to usage. It is important that the companies account for depreciation using the most appropriate manner in order to arrive at a correct value of the assets.
Straight line method of depreciation is the method under which the same amount of depreciation is charged each year. This type of depreciation method is not very appropriate since it ignore the weight age of the usage. But this method is one of the simplest ways to charge deprecation.
Diminishing balance method of depreciation is the most widely and commonly used method of depreciation. Under this method of depreciation a certain percentage is charged as depreciation each year on the closing value of the asset. The highest amount is charged in the initial years. The main advantage of diminishing balance method is that it is simple to implement and understand. It equalises the burden in the statement of profit and loss for the expenses to be made for repairs. The main disadvantage of this method is that the rate can only be calculated if we have the salvage value of the asset, else, this is the most appropriate method of depreciation and it is also recommended by the various authorities.
Sum of digits method of depreciation is very similar to the diminishing balance method. Only instead of using a rate, the depreciation is charged in accordance with the weight age of time. This method is advantageous as it helps to match the expense of lower expense in the initial year with higher depreciation. The main disadvantage of this method is determining the correct life of the machine. (Fridson & Alvarez, 2012)
The units of production method of depreciation charges the depreciation on an asset based on the production or actual usage of the asset. The main disadvantage that this method carries is that it becomes very difficult for the management to project the usage or outcome based on which depreciation is to be charged. This method helps to record depreciation as per usage and activity done by the asset. (Ittelson, 2009)
From the above discussion we can see that the most referred and used method of depreciation is the diminishing method of charging depreciation. The company should implement this method while calculating the depreciation as this is the most appropriate method. Following is the cost of operating the machine and profit for the company after charging depreciation based on diminishing balance method.
|
Total annual cost of operating the machinery |
|||
|
Year ending |
Repair and maintenance |
Depreciation |
Total cost |
|
2014 |
70000 |
4,69,963 |
5,39,963 |
|
2015 |
60000 |
2,85,909 |
3,45,909 |
|
2016 |
90000 |
1,73,937 |
2,63,937 |
|
2017 |
95000 |
1,05,817 |
2,00,817 |
|
2018 |
100000 |
64,375 |
1,64,375 |
|
Year Ending |
Profit before depreciation |
Depreciation |
Profit after depreciation |
|
2014 |
350000 |
4,69,963 |
-1,19,963 |
|
2015 |
340000 |
2,85,909 |
54,091 |
|
2016 |
355000 |
1,73,937 |
1,81,063 |
|
2017 |
360000 |
1,05,817 |
2,54,183 |
|
2018 |
380000 |
64,375 |
3,15,625 |
From the above table we can see that the repairs incurred in the beginning are lower in the initial years and depreciation is higher in the initial years. This helps the balance the profit and loss by equalising the expense incurred on depreciation and repairs
3.Part A:
|
Machine Account |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
01.01.2011 |
Bank |
33,000.00 |
30.06.2011 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2011 |
Bal b/d |
33,000.00 |
30.06.2012 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2012 |
Bal b/d |
33,000.00 |
30.06.2013 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2013 |
Bal b/d |
33,000.00 |
30.09.2013 |
Depreciation |
6,875.00 |
|
30.09.2013 |
Bank |
8,000.00 |
30.09.2013 |
Loss on exchange- P/l |
9,125.00 |
|
30.06.2014 |
Bal c/d |
25,000.00 |
|||
|
41,000.00 |
41,000.00 |
||||
|
01.07.2014 |
Bal b/d |
25,000.00 |
30.06.2015 |
Bal c/d |
27,484.38 |
|
01.07.2014 |
Revaluation reserve |
2,484.38 |
|||
|
27,484.38 |
27,484.38 |
||||
|
Depreciation account |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
30.06.2011 |
P/l account |
1,250.00 |
30.06.2011 |
Bal c/d |
1,250.00 |
|
1,250.00 |
1,250.00 |
||||
|
01.07.2011 |
Bal b/d |
1,250.00 |
|||
|
30.06.2012 |
P/l account |
2,500.00 |
30.06.2012 |
Bal c/d |
3,750.00 |
|
3,750.00 |
3,750.00 |
||||
|
01.07.2012 |
Bal b/d |
3,750.00 |
|||
|
30.06.2013 |
P/l account |
2,500.00 |
30.06.2013 |
Bal c/d |
6,250.00 |
|
6,250.00 |
6,250.00 |
||||
|
01.07.2013 |
Bal b/d |
6,250.00 |
30.09.2013 |
Machine account |
6,875.00 |
|
30.09.2013 |
P/l account |
625.00 |
30.06.2014 |
Bal c/d |
8,437.50 |
|
30.06.2014 |
P/l account |
8,437.50 |
|||
|
15,312.50 |
15,312.50 |
||||
|
01.07.2014 |
Bal b/d |
8,437.50 |
|||
|
30.06.2015 |
P/l account |
8,571.09 |
30.06.2015 |
Bal c/d |
17,008.59 |
|
17,008.59 |
17,008.59 |
Part B:
|
Particulars |
Year ending 2011 |
Year ending 2012 |
Year ending 2013 |
Year ending 2014 |
Year ending 2015 |
|
Fixed Assets |
|||||
|
Gross balance |
33,000.00 |
33,000.00 |
33,000.00 |
25,000.00 |
27,484.38 |
|
Less: Depreciation |
1,250.00 |
3,750.00 |
6,250.00 |
8,437.50 |
17,008.59 |
|
Net Balance |
31,750.00 |
29,250.00 |
26,750.00 |
16,562.50 |
10,475.78 |
Part C:
|
Machine Account |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
01.01.2011 |
Bank |
33,000.00 |
30.06.2011 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2011 |
Bal b/d |
33,000.00 |
30.06.2012 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2012 |
Bal b/d |
33,000.00 |
30.06.2013 |
Bal c/d |
33,000.00 |
|
33,000.00 |
33,000.00 |
||||
|
01.07.2013 |
Bal b/d |
33,000.00 |
30.09.2013 |
Depreciation |
6,875.00 |
|
30.09.2013 |
Bank |
8,000.00 |
30.09.2013 |
Loss on exchange- P/l |
9,125.00 |
|
30.06.2014 |
Bal c/d |
25,000.00 |
|||
|
41,000.00 |
41,000.00 |
||||
|
01.07.2014 |
Bal b/d |
25,000.00 |
01.07.2014 |
Revaluation reserve |
2,484.38 |
|
30.06.2015 |
Bal c/d |
22,515.63 |
|||
|
25,000.00 |
25,000.00 |
||||
|
Depreciation account |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
30.06.2011 |
P/l account |
1,250.00 |
30.06.2011 |
Bal c/d |
1,250.00 |
|
1,250.00 |
1,250.00 |
||||
|
01.07.2011 |
Bal b/d |
1,250.00 |
|||
|
30.06.2012 |
P/l account |
2,500.00 |
30.06.2012 |
Bal c/d |
3,750.00 |
|
3,750.00 |
3,750.00 |
||||
|
01.07.2012 |
Bal b/d |
3,750.00 |
|||
|
30.06.2013 |
P/l account |
2,500.00 |
30.06.2013 |
Bal c/d |
6,250.00 |
|
6,250.00 |
6,250.00 |
||||
|
01.07.2013 |
Bal b/d |
6,250.00 |
30.09.2013 |
Machine account |
6,875.00 |
|
30.09.2013 |
P/l account |
625.00 |
30.06.2014 |
Bal c/d |
8,437.50 |
|
30.06.2014 |
P/l account |
8,437.50 |
|||
|
15,312.50 |
15,312.50 |
||||
|
01.07.2014 |
Bal b/d |
8,437.50 |
|||
|
30.06.2015 |
P/l account |
6,335.16 |
30.06.2015 |
Bal c/d |
14,772.66 |
|
14,772.66 |
14,772.66 |
Fridson, M., & Alvarez, F. (2012). Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley & Sons.
Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. Franklin Lakes, N.J.: Career Press.
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