Question

a. Jade Berhad is a manufacturer of plastic products. The company has consistently used FIFO (first-in, first-out) in valuing inventory, but it is interested to know the effect on its inventory valuation of using weighted average cost instead of FIFO.
At 31 December 2017 the company had inventory of 8,500 standard plastic tables, and has computed its value of the tables on the two bases as:

Basis Unit cost (RM) Total value (RM)

FIFO 20 170,000
Weighted average 22 187,000

During January 2018 the movements on the inventory of tables were as follows:

Date Number of unit Production Cost per unit
Production:
8 January   4,200 18
22January 6,000 18

Revenue: Selling price per unit
12January 9,000 22
18January 1,500 20
24January 2,200 20
28January 4,700 20

Required:
Compute the value of the inventory and gross profit at 31January 2018:
a. Using weighted average cost. (15marks)
b. Using First in First Out (FIFO) method.

Note: In arriving at the total inventory values you should make calculations to two decimal places (where necessary) and deal with each inventory movement in date order.

Answer 1

• All working forms part of the answer
• Working #1: Total Sales Revenue

Sales Revenue
	Units	Unit price	Sales Revenue
12-Jan	9,000	$                                               22.00	$                198,000.00
18-Jan	1,500	$                                               20.00	$                  30,000.00
24-Jan	2,200	$                                               20.00	$                  44,000.00
28-Jan	4,700	$                                               20.00	$                  94,000.00
TOTAL	17,400		$                366,000.00

• Working #2: Flow of units, Ending Inventory Value and Cost of Goods Sold as per WEIGHTED AVERAGE METHOD

Weighted Average Method
	Units	Weighted Average Cost	Amount	Cost of Goods Sold
Beginning	8,500	$                         22.00	$    187,000.00
Production: 8 Jan	4,200	$                         18.00	$      75,600.00
Balance	12,700	$                         20.68	$    262,600.00
Sales: 12 Jan	(9,000)	$                         20.68	$ (186,120.00)	$ 186,120.00
Balance	3,700		$      76,480.00
Sales: 18 Jan	(1,500)	$                         20.68	$    (31,020.00)	$    31,020.00
Balance	2,200		$      45,460.00
Production: 22 Jan	6,000	$                         18.00	$    108,000.00
Balance	8,200	$                         18.71	$    153,460.00
Sales: 24 Jan	(2,200)	$                         18.71	$    (41,162.00)	$    41,162.00
Balance	6,000		$    112,298.00
Sales: 28 Jan	(4,700)	$                         18.71	$    (87,937.00)	$    87,937.00
Ending Inventory Balance	1,300		$      24,361.00
Total cost of Goods Sold				$ 346,239.00

• Requirement ‘a’, based on Working #2 and #1

Sales revenue – Working #1	$           366,000.00
Less: Cost of Goods Sold as per Weighted Average method	$           346,239.00
Gross Profits as per Weighted average method	$              19,761.00
Value of Inventory on 31 Jan 2018 – Working #2	$              24,361.00

• Working #3: Flow of units, Ending Inventory Value and Cost of Goods Sold as per FIFO METHOD

FIFO Method
	Units	Per unit	Amount
Beginning Units	8,500	$                                               20.00	$                170,000.00
Production
08-Jan	4,200	$                                               18.00	$                  75,600.00
22-Jan	6,000	$                                               18.00	$                108,000.00
Sales - Cost of Goods Sold
	8,500	$                                               20.00	$                170,000.00
	500	$                                               18.00	$                    9,000.00
12-Jan	9,000		$                179,000.00
18-Jan	1,500	$                                               18.00	$                  27,000.00
24-Jan	2,200	$                                               18.00	$                  39,600.00
28-Jan	4,700	$                                               18.00	$                  84,600.00
Total cost of Goods Sold	17,400		$                330,200.00
Ending Inventory	1,300	$                                               18.00	$                  23,400.00

• Requirement ‘b’: Based on Working #3 and #1

Sales revenue – Working #1	$                      366,000.00
Less: Cost of Goods Sold as per FIFO – Working #3	$                      330,200.00
Gross Profits as per FIFO	$                         35,800.00
Value of Inventory on 31 Jan 2018 – Working #3	$                         23,400.00