In: Accounting
Zoulman Bhd is a commercial company that trades in wooden products. The main products are wooden tables, windows and cupboards. Since its incorporation, the demand for the company products is high so the company expects better sales growth in the future. However, in this year 2019, the company experienced a pressure on selling prices due to the cheaper selling prices that offer by other competitors for similar products. Zoulman Bhd has three types of inventories. There are wooden door, Wooden Windows and Wooden Cupboards. The current inventory system used by Zoulman Bhd is the periodic system and the inventory cost flow assumption is weighted average method. This method was chosen as it is practical and easy to apply. However, due to the current situation, Mr Nizamm, the company’s accountant, sees the importance of having a detailed flow of inventory cost to identify which of the company’s product(s) contributes the largest margin to the company’s profit. Based on the detailed report, the total amount of inventories in Zoulman Bhd was RM1,020,860 on 1st December 2019 and the company closes its account on 31 December each year. In the following table, the company summarised the relevant inventory costs and beginning unit at 1 December 2019:
Wooden Tables
Model |
Unit |
Cost per unit |
Total Cost |
B1 |
25 |
2800 |
70000 |
B2 |
20 |
1750 |
35000 |
A1 |
15 |
4500 |
67500 |
A2 |
30 |
3250 |
97500 |
90 |
270000 |
Wooden Windows
Unit |
Cost per unit |
Total Cost |
220 |
480 |
105600 |
175 |
560 |
98000 |
330 |
900 |
2970000 |
- |
- |
- |
725 |
500600 |
Wooden cupboards
Unit |
Cost per unit |
Total Cost |
609 |
150 |
91350 |
315 |
158 |
49770 |
460 |
159 |
73140 |
225 |
160 |
36000 |
1609 |
250260 |
Note: Code number (Model A1, A2, B1 and B2) is only applied to Wooden Tables inventory. Mr Nizaam with his team conducted a study to characterize each type of inventory, they found that the business entity purchases their inventories at different prices due to the market prices fluctuation and purchasing from different suppliers. Thus, implementing periodic inventory system and weighted average method are no longer appropriate for the current unease situation as the inventory value may not reflect the current price within the period of price instability. Mr Nizaam has assigned Ms Alyia , a senior account assistant, in order to calculate the value of ending inventory that should appear on Zoulman ’s statement of financial position. in addition, based on the findings of the study of Mr Nizaam’s team, perpetual inventory system is to be applied and different cost flow assumption has been assigned for each type of inventory. The details are given below:
Wooden Tables:
Characteristic: Easily traceable item as it is based on the customer order. The cost of each product is varying depends on its size, colour and shape
Wooden Windows
Characteristic: This item is homogenous; however, Zoulman Bhd acquires this item from a few suppliers. Thus, the cost is erratic.
Wooden cupboards
Characteristic: This item is homogenous and Zoulman Bhd acquires this item from a single supplier.
The followings are the transactions that relate to the purchases and sales of inventories for Zoulman Bhd for the month of December 2019. Net method and freight term are applied based on the individual transaction.
2-Dec Purchase of Wooden Windows from supplier Samass Bhd at the cost of RM47,250 (105 units) with a term 2/10, n/45, FOB destination.
3-Dec Purchase of Wooden Cupboards from Intan Kayu Bhd at the cost of RM50,382 (311 units). Freight term is FOB shipping point. Freight charge incurred RM250.
4-Dec Sold 500 units Wooden Cupboards for the price of RM550 on credit to Gumback Bhd.
5-Dec Gumback Bhd returned 25-unit items from the recent purchase.
10-Dec Sold 15 units of Wooden Tables Model A1 for RM6,000 each.
11-Dec Returned two units of Wooden Windows to the supplier. These units were recently purchased on 2 December 2019.
20-Dec Sold three units of Model A2 for RM5,000 each. Additional costs incurred include RM830 cost on freight FOB destination.
21-Dec Sold 500 units of Wooden Windows for RM850 each.
22-Dec Two defect units of Wooden Windows were returned by a customer.
25-Dec Purchased 11 units of Model B1 from the same suppliers at the same cost.
Required:
Mr Nizaam and his team has suggested the new inventory system (mentioned in the case) and the following cost flow assumption for different types of inventories:
Wooden tables |
Specific Identification Method |
Wooden Windows |
FIFO |
Wooden Cupboards |
- Moving Average Method |
For each type of inventories, give your justification(s) for the cost flow assumption suggested by the team to replace the previous inventory system and cost flow assumption (periodic and weighted average method)
1. Simple identification method= This method is used for rare, unique and high value items. The primary requirement of this method is that every item should be traceable with any stampand serial number.
Wooden tables= Easily traceable item as it is based on the customer order. The cost of each product is varying depends on its size, colour and shape.
So, wooden tables are easily traceable, that's why simple identification method for valuing the inventory is good.
2. FIFO( first in first out) = this method considers first selling out of the material which has been bought firstly. During inflation, fifo method yields a higher value to the end inventory, lower cost of goods sold and higher gross profit.
Wooden windows =This item is homogenous; however, Zoulman Bhd acquires this item from a few suppliers. Thus, the cost is erratic.
We can see the cost of wooden windows are irregular as they are purchased from different suppliers. The use of fifo method is reasonable to provide the approx reasonable original amount to the inventory.
3. Moving average method: this is method is commonly used for those units which are similar to each other.
Window cupboards= This item is homogenous and Zoulman Bhd acquires this item from a single supplier.
As window cupboards are bought form single supplier, their price must be the same, there is no matter of unique and rare material. Hence, we can apply the average method to value the inventory.
In periodic inventory system which has been followed earlier, does not record real time transactions.it creates confusion and disturbances in the valuation of inventory in the situation of unstable prices.
Rather, perpetual inventory system allows you to take records of each and every transations at the time when it executes. It records real time transaction. It is necessary to keep track of data in real time basis in such uncertainities.