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MGT401 - Financial Accounting II - Assignment No 1 Solution and Close Date26th May 2014
GEAR-UP Pvt. Ltd is a leading motorcycle spare parts manufacturer in Pakistan. Prices of auto spare parts have been changing from previous four years drastically, due to inflation prevails in the country thus the prices of spare parts are considered volatile. As per rule of IAS -2 there are two methods available one is ‘FIFO’ (first-in, first-out) and second is ‘weighted-average cost method’ to measure the cost of inventory. In and out record of product “SP001” has been extracted form books of GEAR-UP Pvt. Ltd as on December 31, 2013 is as follows:
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REQUIREMENTS:
Calculate the cost of inventory under FIFO and weighted average method. (05Marks)
Calculate Gross profit under both methods if selling price of SP001 is Rs.250 per unit. (03Marks)
Give the reason of difference in profit under both methods, which method results in higher tax burden and why? (02Marks)
Solution Idea Here
Calculate the cost of inventory under FIFO and weighted average method.
FIFO method:
Date
Receipt/Issue
Value of Stock
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Dec 1
200×RS130=26,000
26,000+ 45,000=71,000
Dec 8
300×Rs150=45,000
Dec 10 (sale)
150×Rs130=19,500
50×Rs130= 6500 Remaining
300×Rs150=45,000
Dec22
100×Rs200=20,000
6500+45,000+20,000=71,500
Dec30
50×Rs130=6500
30×Rs150=4500
40,500+20,000=Rs60,500 Remaining
Weighted Average Method
Date
Receipt/Issue
Value of Stock
Average Cost
Dec 1
200×RS130=26,000
26,000
26,000/130=Rs200
Dec 8
300×Rs150=45,000
26,000+45,000=71,000
71,000/500=Rs142
Dec 10
150×Rs142=21,300
71,000-21,300=49,700
49,700/350=Rs142
Dec 22
100×Rs200=20,000
49,700+20,000=69,700
69,700/450=Rs154.89
Dec 30
80×Rs154.89=12391.2
69,700-12391.2=57308.8
57308.8/370=Rs154.89
Question No #2
Calculate Gross profit under both methods If selling price of SP001 is Rs.250 per unit.
In case of FIFO:
Unit Sold=150+80=230
Sale Price= 230×250= 57,500
Cost= 19,500+4,500=24,000
Gross Profit=57,500-24,000=33,500
In case of Weighted Average Method
Cost=21,300+12391.2=33691.2
Gross Profit= 57,500- 33691.2= 23,808.8
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