MGT401 Financial Accounting II Assignment 1 Solution Spring 2014

Case
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:

 
Details of “SP001” received and issued as on December, 31 2013
Date Description Per unit in Rs.
Dec.1st
Received 200 units 130
Dec.8th Received 300 units 150
Dec.22nd Received 100 units 200
Dec.10th Sold 150 units
Dec.30th Sold 80 units

 

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:

       

FIFO Method

     
             
             
                         
    Date

Received

Issued

Balance

 
      Units Cost Amount Units Cost Amount Units Cost Amount  
   

1-Dec

200

130

26000

     

200

130

26000

 
   

8-Dec

300

150

45000

     

200

130

26000

 
                 

300

150

45000

 
   

10-Dec

     

150

130

19500

50

130

6500

 
                 

300

150

45000

 
   

22-Dec

100

200

20000

     

50

130

6500

 
                 

300

150

45000

 
                 

100

200

20000

 
   

30-Dec

     

50

130

6500

270

150

40500

 
           

30

150

4500

100

200

20000

 
                         
                         
       

Weighted Average Method

     
             
             
                         
    Date

Received

Issued

Balance

 
      Units Cost Amount Units Cost Amount Units Cost Amount  
   

1-Dec

200

130

26000

     

200

130

26000

 
   

2-Dec

300

150

45000

     

500

142

71000

 
   

10-Dec

     

150

142

21300

350

142

49700

 
   

22-Dec

100

200

20000

     

450

154.89

69700.5

 
   

30-Dec

     

80

154.89

12391.2

370

154.89

57309.3

 
                         

Part B

 To calculate Gross profit under FIFO Method:

Unit Sold=150+80=230

Sale Price= 230×250= 57,500

Cost= 19,500+4,500+6500=30500

As we know that the formula of Gross profit is

Gross Profit = Sales – Cgs

Gross profit =57500-30500

Gross Profit =27000
To calculate gross Profit under weighted Average Method:

Units Sold = 150+180 =230

Sale price =230 x 250 = 57500
Cost =21300+12391.2=33691.2

As we know the formula of Gross profit

Gross profit = Sales – Cgs

Gross profit = 57500-33691.2

Gross Profit = 23808.8

Part b

FIFO method will result in Higher Tax because material purchased for the first time would be in stock and the price would be higher than the opening stock.

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