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Hi,
In the BPP revision kit there is a question regarding the effect of change in inventory valuation from FIFO to AVCO on profit. It says that in 2017, closing inventory was 15000 in FIFO and would have been 13400 in AVCO, and in 2018, it was 20000 in FIFO and would have been 15000 in AVCO.
The company is changing the basis on inventory valuation from FIFO to AVCO.
My thinking would be that CoS in FIFO is 20,000(closing inv 2018) – 15,000(closing inv 2017)=5,000, while in AVCO it would have been 18,000-13,400=4,600.
Therefore, CoS would be 400 lower with AVCO, so profit would increase by 400.
However, in the solution to the question the answer is decrease by 400.
Explanation isn’t provided in the BPP kit, and the calculation is confusing.
I would appreciate your help.
Thanks in advance ! 🙂
Hi,
I think the answer is right and we can get there by pretending that the purchases figure is 100,000 and then use this in the CoS calculation with the figures given above.
FIFO = (18,000) + (100,000) – 20,000 = (98,000)
AVCO = (13,400) + (100,000) – 15,000 = (98,400)
So now we can see that CoS is higher under the new method and therefore profits lower.
Thanks
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