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Please can you help me to understand the following from the BPP book:
If during the period 80 units are sold at $40 each, the gross profit will be:
Sales (80×40)= 3,200
Cost of sales (80×21)=1,680
Gross profit = 1,520Th value of closing (unsold) inventory will be $420 (20×21) … How did they get to this answer!?!? I’m confused!!
Thanking you in advance for your help
I do not work for BPP and so I do not have the BPP book.
I need the rest of the question to be able to explain. I can only guess that maybe the production was 100 units? (and so 20 left in inventory)
Sorry! The whole example is as follows …. I just done understand how they get to the value of the unsold inventory
A business has the following costs for a period
Materials 600
Labour 1000
Production overheads 500
Administration overheads 2,800During the period 100 units are produced. If all of these costs were allocated to production units each unit would be valued at $28
This would be incorrect. Only production costs are allocated to units of inventory. Administrative overheads are non- production costs.
So each unit of inventory should be valued at 21 ((600+1,000+500)/100)
This affects both gross profit and the valuation of closing inventory. If during the period 80 units are sold at $40 each, the gross profit will be
Sales (80×40) = 3,200
Cost of sales (80×21) = 1,680
Gross profit= 1,520The value of closing (unsold) inventory will be 420 (20×21)
Many thanks for your help John, I’m self studying and now wish I had just used your course notes!! I am combining this book with your lectures which I find most useful so thank you
Both the cost of sales, and any closing inventories, are valued at the production cost per unit.
Are you happy with how they have calculated the $21? (The total production costs are $2,100, and in total 100 units are produced, so $21 per unit).
Of the 100 produced, only 80 were sold and therefore the other 20 remain in inventory.
The 80 sold have a cost of 80 x $21; and the 20 left in inventory have a cost of 20 x $21.Hope that makes sense.
Yes, I understand how they reached $21 and with your explanation now understand this example fully.
Thank you very much for your help, it’s much appreciated.
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