Question

Bendigo Pottery Ltd is a wholesale distributor of hand-made glazed garden pots to retail stores. All garden pots are identical. Details for January 2020 are shown below.

January	1	Opening inventory	2,000 pots – cost $39 each
	8	Sales	1,200 pots – selling price $80 each
	9	Purchases	1,600 pots – purchase price $44 each
	28	Sales	1,800 pots – selling price $84 each
	31	Closing inventory	600 pots from the stock stake

Additional information:

1. Freight costs from the supplier to the Bendigo Pottery Ltd.’s warehouse is $4 for each garden pot.
2. One hundred and eighty (180) of the garden pots on hand at 31 January have imperfections in the glazing and can only be sold for $30 each after handling and repackaging of $10 for each pot.
3. The latest selling price of the garden pots is $84 each.
4. Bendigo Pottery Ltd prepares monthly reports and applies the periodic (physical) and the weighted average cost (WAC) method.

Required:

1. Briefly explain why Bendigo Pottery Ltd uses the weighted average cost flow method for its glazed garden pots.

2. Calculate the value of total closing inventory at 31 January 2020 as provided for in AASB 102. Justify all assumptions and calculations.

3. Prepare the general journal entry at 31 January 2020 for any inventory write down.

Answer 1

a.)	Weighted average cost is caclculated by dividing the cost of goods available for sale by the number of units available for sale.Weighted average Cost method is reasonable to use when the goods are homogeneous, or when it is difficult to make a cost flow assumption.The ending inventory reported under the method is influenced by all the purchase prices paid during the year, and thus evens out the effect of price increases or decreases on ending inventory value. Bendigo Pottery Ltd. has opening inventory of 2,000 units was priced at $ 39 per unit, while subsequent purchases of 1,600 units are priced at $ 44 per unit. While sales have occurred from both lots, therefore the company has found weighted average cost method to be more appropriate.
b.)		Units	Cost per Unit	Amount $
	Opening inventory	2,000	39	78,000
	Purchases	1,600	48 ( 44 + 4 )	76,800
	Goods available for Sale	3,600	43 (154,800 / 3,600)	1,54,800
	Cost of Sales	3,000	43	1,29,000
	Closing inventory	600	43	25,800
	Inventory is to be valued at the lower of cost or net realizable value.
	Value of ending inventory	$ 23,460	( ( 600 - 180) x 43 )+ (180 x 30 )
c.)	Date	Account Titles	Debit $	Credit $
	Jan 31, 2020	Inventory Write Down Loss	2,340
		Inventory		2,340
		( 25,800 - 23,460 )