MGT402 Cost & Management Accounting GDB 1 Solution Fall 2014

Cost and Management accounting (mgt402)

Dear Students!

This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on November 18, 2014 for discussion and last date for posting your discussion will beNovember 21, 2014.

Topic/Area for Discussion

Learning Objective:

After going through this GDB, the students are expected to learn the mechanism which is important in valuing the unsold year-end inventory is the primary source of complexity in figuring out the cost of goods sold.

Learning Outcome:

After going through this activity, the students would be able to understand that choice of selecting inventory valuations methods in assigning cost is not relatively minor issue. However, the choice of inventory valuation methods can dramatically affect the reported cost of goods sold, gross profit, and net income.

Case:

A Forensic lab buys and sells a substance for fume hoods which are primarily designed to improve safety and hygiene in light bioengineering settings Assume that Lab can sell an ounce of substance for Rs.500 that costs it Rs.250.Lab manager bought 150 and 100 sold precisely ounces of substance during the year.

In the factual world, the per ounce cost is likely to fluctuate. Like many businesses, the Lab may offer more than one type of product with changing prices. In order to accurately compute the cost of goods sold, the manager of the lab should be able to get an accurate count of unsold inventory on hand and he also has to assign the “correct” costs to these products.

We may have an idea of using different valuation methods in which costing of ending inventory is a relatively minor issue. However, the choice of inventory flow assumption can dramatically affect the reported cost of goods sold, gross profit, and net income.

Lab received four shipments during the year as follows: 40 ounces costing Rs.152.5; 30 ounces costing Rs.180; 40 ounces costing Rs.300; and 40 ounces costing Rs.350.Different valuation methods will yield different ending inventory figures.

Requirement:

You are required to apply all three (LIFO, FIFO and weighted average) valuation methods to arrive at closing inventory. Further it is expected to calculate Gross profit though all three valuation methods to observe how much variation exists in gross profit percentage to see which valuation method is useful for Lab.

Solution: Lab should adopt FIFO for better gross profit

Cost of closing inventories

As per FIFO            Rs. 17,000

As per LIFO            Rs. 7,900

As per W.Avg         Rs. 12,500

Gross Profit

As per FIFO         Rs. 29,500.00     59%

As per LIFO         Rs. 20,200.00     40.4%

As er W.Avg       Rs. 25,00000       50%