Question

QUESTION 2

The board of directors of Amer Bhd is considering whether it should instruct the accounting department to change its inventory cost flow assumptions from First-in-First-out (FIFO) basis to an average costs. The following information has been extracted from the records of Amer Bhd about its products; Viral15. Amer Bhd uses perpetual inventory system and its reporting period ends on 30 June. The following information related to an inventory; Viral15:

Date	Particular	Unit	Purchase Price RM/Unit	Selling Price RM/Unit
01/07/19	Beginning balance	4,000	80.00
06/08/19	Purchased	1,500	80.50
05/09/19	Sold	5,000		123.00
19/11/19	Purchased	10,000	77.50
24/11/19	Purchase returns	550	77.50
30/05/20	Sold	9,200		122.50

REQUIRED:

(Round all figures to TWO (2) decimal points)

1. Calculate the cost of inventory on hand as at 30 June 2020 and the cost of sales for the year ended 30 June 2020, using:

1. the FIFO cost flow assumptions.                            
2. the moving average cost flow assumptions.                                 

                                                                      

Show your workings clearly by following the given format:

	Purchases			Cost of goods sold			Ending balance
Date	Unit	Unit Cost (RM)	Total cost (RM)	Unit	Unit Cost (RM)	Total cost (RM)	Unit	Unit Cost (RM)	Total cost (RM)

2. It is expected that the purchase cost of inventory will keep increasing. If Amer Bhd wants to minimize the income in order to pay least tax, suggest cost flow assumptions (FIFO or average cost) that is more relevant. Justify your answer.

                                                                                          

Answer 1

when the prices are rising the Weighted averaged cost method is better for valuation of inventory as in FIFO the cost of goods sold is least since old inventory is used first . But weighted average method adjusts the current price regularly to show effect of on cost of goods sold.