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  1. avatar says

    I’m sorry but in test 3 I don’t understand the logic.
    The FIRST IN were the 700 from last year. Then the next purchases were 500 engines July 1st 07. Then the LAST purchases were for 300 engines on 1st Feb 2008.
    So you seem to be taking the last in, then the previous in on july 1st 07 then finally the first in from last year.
    Please explain why your answer is correct when it seems like you are taking the latest purchases as your first calculation then finally taking 50 from last year’s (the first in) 700 at the end of your calculation.

    • Profile photo of John Moffat says

      FIFO assumes that whenever we sell any, that we always sell the oldest ones first.
      Therefore any inventory left at the end is always the most recent purchases.

      I do suggest that you watch the lecture again on FIFO.

      • avatar says

        Ah of course. I kept thinking in terms of what was sold rather then what was left in the closing inventory.
        This is why I saw everything in the opposite way.

        Thanks!

  2. avatar says

    in test 2, what does carriage inwards an outwards exactly mean?
    and is depreciation of the plant considered because it affects the manufacturing of the products and is part of the manufacturing cost?

    • Profile photo of John Moffat says

      carriage is another word for delivery.

      Carriage inwards is cost of delivery into the factory (i.e. an extra cost of getting the materials) therefore is included in the valuation of inventory.
      Carriage outwards is the cost of delivery out of the factory (i.e. to customers) – this is not a cost of production.

      Depreciation of plant is a cost of manufacturing (it is the machines in the factory)

    • Profile photo of John Moffat says

      As you will have seen in the lecture, the inventory figure in the statement is the amount actually counted at the end of the financial period. The owner is not going to have waited until it was counted and then decided to take some.
      So we do not change the final inventory figure but instead we remove it from the purchases figure. Every time the business buys any it will have been debited to purchases. If some of them are taken by the owner, we credit purchases (only the balance was actually used by the business) and debit drawings (to ‘charge’ the owner).

      • Profile photo of jose says

        Thank very much, Ive reviewed the lecture and now understand the inventory is counted at the end of each period.

  3. avatar says

    please can you explain about first part of this vdieo ,talking about FIFO method or LIFO Method? why you use $15 first and second $14??? for FIFO METHOD

    [On 1 November 2002 a company held 300 units of finished goods valued at $12 each.
    During November the following purchases took place:
    Date Units purchased
    Cost per
    unit
    10 November 400 $12.50
    20 November 400 $14
    25 November 400 $15
    Goods sold during November were as follows:
    Date Units sold Sales price
    per unit
    14 November 500 $20
    21 November 400 $20
    28 November 100 $20]

  4. avatar says

    Hi John,

    Test question 2. Please could you explain why the depreciation is included is valuing in inventory when the depreciation will then be taken off the profit in the profit and loss account?

    Thanks Rich

    • Profile photo of John Moffat says

      It is for the same reason that materials and labour are included (even though they are expenses in the Statement of profit or loss).
      They are part of the costs of production. However, to calculate the profit we need the cost of the goods actually sold. So we subtract from the cost of production the cost of the goods that are not sold i.e. the closing inventory.

  5. avatar says

    Please can you explain how 2950 is the right answer for this question?

    An inventory record shows the following details for the month of February;

    Feb 1: 50 units in stock at a cost of $40 per unit.
    Feb 7: 100 units purchased at a cost of $45 per unit
    Feb 14: 80 units sold
    Feb 21: 50 units purchased at a cost of $50 dollars per unit
    Feb 28: 60 units sold.

    what is the value of closing inventory at 28 feb using the fifo method?

    • Profile photo of John Moffat says

      dreamer: you misread the question. 2950 was not given and you were not asked for cost of sales!

      Jide: if you count the units, there are 60 units left at the end (50 + 100 – 80 + 50 – 60)
      With FIFO these must be the most recent purchases, so 50 of them were bought on Feb 21 at $50 each, and the other 10 were bought on Feb 7 at $45 each. (50 x $50) + (10 x $45) = 2950.

      • Profile photo of John Moffat says

        It is applicable to question 3, and the answer is correct.

        There were 700 units at the start of the month. They bought 800 and sold 650, so at the end of the month there were 850 units.

        Using FIFO, 300 were bought on 1 Feb; 500 were bought on 1 July, and the remaining 50 must have been part of the inventory on 1 May.

      • avatar says

        Mr. John, your analysis above does note equal to 188,500. Besides, using Fifo, We have 700 engines in May 2007 @190 = 133,000, then 150 engines out of 500 in July 2007 I.e 150 * 220=33000, so total value of closing inventory is 166,000. Pls correct me

      • Profile photo of John Moffat says

        Of course it equals 188,500 – you have not costed out what I wrote!!!

        300 bought on 1 Feb at 230 = 69,000

        500 bought on 1 July at 220 = 110,000

        50 still there from 1 May at 190 = 9,500

        69,000 + 110,000 + 9,500 = 188,500.

        (Maybe you have not checked the dates properly – the year ends on 30 April 2008)

    • Profile photo of John Moffat says

      LIFO is not allowed (IAS 2)

      In example 5, I have calculated it using FIFO (first-in-first-out) and using average cost.
      Both methods are allowed by IAS 2, and in the exam you can be asked for calculations using either of the two ways.

      Have you downloaded the Course Notes that go with the lectures? There you will find headings for FIFO and for Average methods (and as well as going through them in the lecture, the answers are at the back of the Course Notes).

  6. avatar says

    I have a question plz.

    — if the closing inventory have been understated in the year by 22500, what will be the effect on the profit this year and next year ?

    a) the current year’s profit will be OVERSTATED and next years’ profit will be understated
    b) the current year’s profit will be UNDERSTATED and next years’s profit will be overstated

    • avatar says

      Hi pretty1,

      The question asks to calculate the value of closing inventory. To calculate the number of units for closing inventories, we can say…
      Opening Inventory Units + Purchased Units – Sold Units = Closing Inventory Units
      300 + (400+400+400) – (500+400+100) = 500 units

      Maybe you were thinking of cost of sales: Cost of Sales = Opening Inventory + Purchases – Closing Inventories

  7. avatar says

    Why does a higher closing inventory lead to a higher profit and lower closing inventory lead to a lower profit? The more units you have in closing inventory the less you sold in the year, thus it should be the more closing inventory the lower the profit. Help me understand.

  8. avatar says

    HI! I have an exam tomorow so pleasee help me quick!
    Test Q2: why does the answer include administrative overheads??
    Shouldn’t only production costs be included? and here there is only carriage inwards and no other….though I am confused about whether we could include factory plant depreciation…
    what is meant by general administrative overheads?
    Please Help!

  9. avatar says

    Hello, I have a similar exercise in Kaplan Exam Kit(exercise 26/page 8):
    A. buys and sells inventory during the month of August as follow:
    Opening inventory-100 units 2.52/unit
    4 August -sales 20 units
    8 August-purchases 140 units 2.56/unit
    10 August-sales 90 units
    18 august Purchases 200 units 2.78/unit
    20 August Sales 180 units
    The AVCO is calculatedas follows:
    100 units*2.52=252
    140units*2.56=358
    200 units*2.78=556
    average cost per unit(252+358+556)/440=2.65
    Closing inventory 150*2.65=397.5
    The question is if I follow the Kaplan’s way and do the exercise which we have in a lecture the result is completly different.I’m confused and do not know what is correct

  10. avatar says

    Good evening! Could you explain me one thing? I’m confused very much!
    Why in FIFO approach do we take not oldest units (300* 12 and 200*12,50), but latest (400*15 and 100*14)?
    It’s not the “first-in” units, but last!

    I’m waiting for your reply!

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