Chapter 7
Materials: Controlling and Costing
Discussion Questions
1) The most frequent use forms in the procurement
and use of materials are: purchase requisition,
purchase order, receiving report, material requisition,
bill of materials, and materials ledger card.
2) For these incidental purchases, the same procedure
applies as for productive materials. At times, a
blanket purchase order is issued to cover repetitive
services such as typewriter repairs. However for
responsibility control purposes, a purchase order is
advisable even though this type of form might add
more paperwork.
3) The invoice should be routed to the accounting
department immediately upon receipt. A copy of the
purchase order and a copy of the receiving report
with an inspection report attached thereto should be
compared by the accounting clerk, when the invoice
is found to be correct in all aspects or has been
adjusted for errors or rejects, the accounting clerk
approved the invoice, attaches it to the underlying
documents, and sends these papers to another clerk
for the preparation of the voucher.
4) 360/ 60 10 = 7.2 x 2% = 14.4%
5) (a) Inventoriable cost is purchase price less
purchase discount add freight in & applied
acquisition costs. (b) Administrative costs are not
Inventoriable.
6) Several methods are possible: (a) Inventory
differences (b) Metering conveyor belt (c) use of
factors
7) The average cost method assumes that each batch
taken from the storeroom is composed of uniform
quantities from each shipment in stock at the date of
issue. The IFO method is based on the assumption
that the first goods received are the first issued. The
LIFO method is based on the assumption that the
latest goods received are the first issued.
8) In an inflation economy, LIFO provides a better
matching of current costs with current revenue
because costs of inventory issued are at more recent
purchase prices. Net cash inflow is generally
increased because taxable income is generally
decreased, resulting in payment of lower income tax.
9) (a) FIFO (b) FIFO (c) FIFO (d) LIFO (e) FIFO (f)
LIFO (g) LIFO (h) LIFO (i) LIFO (j) FIFO (k) LIFO
(l) LIFO (m) FIFO (n) FIFO
10) Although it is common to speak of a method of
inventory costing, it is also the method of costing
materials into production. Since the cost of materials
issued during a fiscal period is usually much greater
than the ending inventory, and since the cost of goods
sold is much more significant than the inventory
figure, the principal impact is on the income
statement and not on the balance sheet.
11) (1) In principle inventories are to be valued at
cost. (2) Where cost cannot be recovered upon sale in
the ordinary course of business, a lower figure is to
be used. (3) This lower figure is normally market
replacement cost.
12) The lower figure is normally market replacement
cost, except that the amount should not exceed the
expected sales price less a deduction for costs yet to
be incurred in making the sale. On the other hand this
lower market figure should not be less than expected
amount to be realized in the sale of goods, reduced by
a normal profit margin.
13) To be most accurate, dollars received from the
sale of scrap reduces the cost of materials. The credit
from scrap sales would then be to work in process if
the scrap comes from materials issued for production,
or to factory overhead control if the material was
issued for indirect use.
14) Scrap and waste materials are likely to have
relatively little value compared to the original cost of
materials from which the scrap is generated.
Therefore, it is important that the quantity of scrap
and waste be controlled by introducing corrective
measures before preventable losses occur.
15) When defective production is inherent in the
manufacturing process, or occurs with a reasonable
degree of predictability, or is not caused by special
conditions, or provisions of a particular order, the job
should carry a proportionate cost of the spoiled and
defective work. Therefore this cost should be treated
as Factory Overhead. Likewise the added cost of
bringing defective units up to standard quality should
be treated as factory overhead.
 Exercises

E-1

Total Freight = $ 162

1)

On cost bases (Freight allocation):

Pepto : Lenco : Bilco

1125 : 1350 : 1575

225 : 270 : 315

45 : 54 : 63

15 : 18 : 21

5 : 6 : 7

Total ratio = 5 + 6 + 7 = 18

Pepto = 162 5/18 = $ 45

Lenco = 162 6/18 = $ 54

Bilco = 162 1/18 = $ 63

$ 162

2)

On weight bases (Freight allocation)

Pepto : Lenco : Bilco

450 : 600 : 750

9 : 12 : 15

3 : 4 : 5

Total ratio = 3 + 4 + 5 = 12

Pepto = 162 3/12 = $ 40.5

Lenco = 162 4/12 = $ 49.8

Bilco = 162 5/12 = $ 67.5

$ 162

E-2

Material Costing Method

1)

Average costing

Date Receipts Issue Balance

Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 500 @ 1.20 600

6 200 @ 1.25 250 700 @ 1.214 850

10 400 @ 1.30 520 1100 @ 1.245 13750

15 560 @ 1.245 697 540 @ 1.245 672

25 500 @ 1.40 700 1040 @ 1.319 1372

27 400 @ 1.319 527.6 640 @ 1.319 844.160

Purchases= 1470 C.G.S = 1225 Closing stock = 844.160

2)

LIFO Costing

Date Receipts Issue Balance

Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 500 @ 1.20 = 600

 6 200 @ 1.25 = 250 500 @ 1.20 = 600

200 @ 1.25 = 250

10 400 @ 1.30 = 520 500 @ 1.20 = 600

200 @ 1.25 = 250

400 @ 1.30 = 520

15 400 @ 1.30 = 520 500 @ 1.20 = 600

160 @ 1.25 = 200 40 @ 1.25 = 50

25 500 @ 1.40 = 700 500 @ 1.20 = 600

40 @ 1.25 = 50

500 @ 1.40 = 700

27 400 @ 1.40 = 560 500 @ 1.20 = 600

40 @ 1.25 = 50

100 @ 1.40 = 140

Purchases= 1470 C.G.S = 1280 Closing stock = 790

3)

LIFO Costing

Date Receipts Issue Balance

Jan Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 500 @ 1.20 = 600

6 200 @ 1.25 = 250 500 @ 1.20 = 600

200 @ 1.25 = 250

10 400 @ 1.30 = 520 500 @ 1.20 = 600

200 @ 1.25 = 250

 400 @ 1.30 = 520

15 500 @ 1.20 = 600 140 @ 1.25 = 175

60 @ 1.25 = 75 400 @ 1.30 = 520

25 500 @ 1.40 = 700 140 @ 1.25 = 175

400 @ 1.30 = 520

500 @ 1.40 = 700

27 140 @ 1.25 = 175 140 @ 1.30 = 182

260 @ 1.30 = 338 5000 @ 1.40 = 700

Purchases= 1470 C.G.S = 1288 Closing stock = 882

E-3

1)

FIFO

Date Receipts Issue Balance

Oct unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 700 @ 5 = 3500

3 400 @ 5 = 2000 300 @ 5 = 1500

4 300 @ 5.20 = 1560 300 @ 5 = 1500

300 @ 5.20 = 1560

8 300 @ 5.20 = 1560 300 @ 5 = 1500

600 @ 5.20 = 3120

9 300 @ 5 = 1500 400 @ 5.20 = 520

200 @ 5.20 = 1040

 11 300 @ 5.20 = 1500 100 @ 5.20 = 520

13 1000 @ 5.10 = 5100 100 @ 5.20 = 520

1000 @ 5.10 = 5100

21 400 @ 5.50 = 2200 100 @ 5.20 = 520

1000 @ 5.10 = 5100

400 @ 5.50 = 2200

23 100 @ 5.20 = 520 500 @ 5.10 = 2550

500 @ 5.10 = 2550 400 @ 5.50 = 2200

27 500 @ 5.10 = 2550 100 @ 5.50 = 550

300 @ 5.50 = 1650

29 300 @ 5.60 = 1680 100 @ 5.50 = 550

300 @ 5.60 = 1680

Cost of material used = Closing inventory = 2230

13370

2)

FIFO

Date Receipts Issue Balance

Oct unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 700 @ 5 = 3500

3 400 @ 5 = 2000 300 @ 5 = 1500

4 300 @ 5.20 = 1560 300 @ 5 = 1500

8 300 @ 5.20 = 1560 300 @ 5.20 = 1560

300 @ 5 = 1500

600 @ 5.20 = 3120

 9 500 @ 5.20 = 2600 300 @ 5 = 1500

100 @ 5.20 = 520

11 100 @ 5.20 = 520 100 @ 5 = 500

200 @ 5 = 1000

13 1000 @ 5.10 = 5100 100 @ 5 = 500

1000 @ 5.10 = 5100

21 400 @ 5.50 = 2200 100 @ 5 = 500

1000 @ 5.10 = 5100

400 @ 5.50 = 2200

23 400 @ 5.50 = 2200 100 @ 5 = 500

200 @ 5.10 = 1020 800 @ 5.10 = 4080

27 800 @ 5.10 = 4080 100 @ 5 = 500

29 300 @ 5.60 = 1680 500 @ 5 = 500

300 @ 5.60 = 1680

Cost of material used = Closing inventory = 2180

13420

3)

Average costing

Date Receipts Issue Balance

Oct unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 700 @ 5 = 3500

3 400 @ 5 = 2000 300 @ 5 = 1500

4 300 @ 5.20 = 1560 600 @ 5.1 = 3060

8 300 @ 5.20 = 1560 900 @ 5.13 = 4620

9 500 @ 5.13 = 1539 100 @ 5.13 = 2052

11 300 @ 5.13 = 1539 100 @ 5.13 = 513

13 1000 @ 5.10 = 5100 1100 @ 5.10 = 5613

21 400 @ 5.50 = 2200 1500 @ 5.21 = 7813

23 600 @ 5.21 = 3126 900 @ 5.21 = 4689

27 800 @ 5.21 = 4168 100 @ 5.21 = 521

29 300 @ 5.60 = 1680 400 @ 5.50 = 2201

Cost of material used Closing inventory =2210

=13398
E-4

Material Costing Method

1)

FIFO

Date Receipts Issue Balance

Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 800 @ 6 = 4800

5 200 @ 7 = 1400 800 @ 6 = 4800

200 @ 7 = 1400

16 400 @ 6 = 2400 800 @ 6 = 4800

200 @ 7 = 1400

200 @ 8 = 1600

24 300 @ 9 = 2700 400 @ 6 = 2400

200 @ 7 = 1400

200 @ 8 = 1600

300 @ 9 = 2700

27 400 @ 6 = 2400 100 @ 7 = 700

100 @ 7 = 700 200 @ 8 = 1600

300 @ 9 = 2700

Cost of material used = October 31 inventory = $

$ 5500 5000

2)

FIFO

Date Receipts Issue Balance

Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 800 @ 6 = 4800

5 200 @ 7 = 1400 800 @ 6 = 4800

200 @ 7 = 1400

9 200 @ 8 = 1600 800 @ 6 = 4800

200 @ 7 = 1400

200 @ 8 = 1600

16 200 @ 8 = 1600 800 @ 6 = 4800

200 @ 7 = 1400

24 300 @ 9 = 2700 800 @ 6 = 4800

300 @ 9 = 2700

27 300 @ 9 = 2700 600 @ 6 = 3600

200 @ 6 = 1200

Cost of material used = October 31 inventory =

6900 3600

3)

Average Costing

Date Receipts Issue Balance

Oct Qty Rate Amount Qty Rate Amount Qty Rate Amount

1 800 @ 6 = 4800

5 200 @ 7 = 1400 1000 @ 6.2 = 6200

9 200 @ 8 = 1600 1200 @ 6.5 = 7800

16 400 @ 6.5 = 2600 800 @ 6.5 = 5200

24 300 @ 9 = 2700 1100 @ 7.132 = 7900

27 500 @ 1.182 600 @ 7.182 = 4310

Cost of material used =6191 October 31

inventory=4310

4)

Market price at the date of issue

Opening Inventory

800 @ 6 = 4800

Purchases

200 @ 7 = 1400

200 @ 8 = 1600

300 @ 9 = 2700

5700

Issue

400 @ 8 = 2400

500 @ 9 = 4500

6900
E-5

a)

Material ledger card using average method

Date Receipts Issue Balance

Jan unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 2000 @ 9.775=19550

6 1500 @ 10.300=15450 3500 @ 10 = 35000

7 1800 @ 10 = 18000 1700 @ 10 = 17000

26 3400 @10.750= 36550 5100 @ 10.5 = 19950

31 3200 @ 10.5 = 33600 1900 @ 10.5 = 53550

Cost of material Closing inventory= 19950

used=51600

b)

Cost of Material used

= No of units used Average unit cost

= 5000 10

= 50,000 + (5000 0.3695)

= 50,000 + 184.8

= $ 51848

Ending inventory cost = 1900 10

= 19000
E-6

1)

Schedule of Dec 31, 19A Inventory: (LIFO Costing)

4000 @ 11.92 = 47680

8000 @ 12 = 96000

32000 @ 12.40 = 39680

15200 (total cost) = 18336

2)

Sales (47200 16) 755200

Less: C.G.S (FIFO) 580760

Gross profit 174440

Working:

No of units sold = 4000 + 58400 _ 15200

= 47200 units

C.G.S = Opening inventory + Purchases _ Closing inventory

= 47680 + 723936 _ 190856

= $ 580760

Closing inventory $

7200 @ 12.68 = 91296

6400 @ 12.80 = 81920

1400 @ 12.60 = 17640

15200 = 190856
E-7

Opening inventory

19A 19B 19C

LIFO: $80,000 $140,000 $60000

NOTE:

When closing inventory is reduced, cost of goods sold is increased, as a result of this, Gross
profit also reduces and ultimately opening income will also reduce by exact amount as reduced
in closing inventory and vice versa.

Operating Income

19A 19B 19C

$ $ $

FIFO: 20,000 60,000 20,000

Avg: 60,000 160,000 40,000

Material Controlling and Costing

Topic#2

Defected and spoiled production

Journal Entries

LOSS CHARGED TO JOB: LOSS CHARGED TO ALL PRODUCTIO

1) When work is started SAME

W-I-P A/C
Material A/C
Payroll A/C
FOH applied A/C

(Being cost of work started)

2) When units become defected and
rework is done:
FOH A/C
W-I-P A/C
Material A/C Material A/C
Payroll A/C
FOH applied A/C Payroll A/C
(Being cost of rework)
FOH applied A/C

(Being cost of rework)

3) When units become spoiled: Spoiled work A/C (sale price)

Spoiled work A/C (sale price)
FOH A/C (actual loss)
W-I-P A/C
(Being cost of spoiled work) W-I-P A/C (total loss)

(Being cost of spoiled work)

4) For completion of goods: SAME

Finished goods A/C
W-I-P A/C
(Being cost of work completed)

5) For sale of spoiled work: SAME

Cash A/C
Spoiled work A/C
(Being sale of spoiled work)
E-8

Req:1

Total amount of material available for sale (FIFO & LIFO)

= Opening inventory + Purchases

FIFO LIFO
= (2002) + (2202.40) = (2002) + (2202.40)
= 400 + 528 = 400 + 528
= $ 928 = $ 928
Working

Units purchased = units in ending inventory+units sold_units in opening inventory

FIFO LIFO
= 240 + 180 _ 200 = 240 + 180 _ 200
= 220 units = 220 units

Income statement

FIFO

Sales (1803.60) 648

Less: Cost of goods sold (1802) 360

Gross profit / Income before tax 288

Less: Income tax 50% (28850/100) 144

Income after tax 144

LIFO

Sales (1803.60) 648

Less: C.G.S (1802.40) 432

Gross profit /Income before tax 216

Less: Income tax (21650%) 108

Income after tax 108

Cost of ending inventory

FIFO

Units Unit cost Amount

$ $

20 2 40

220 2.40 528

Ending inventory 568

LIFO

Units Unit cost Amount

$ $

200 2 400

40 2.40 96

Ending inventory 469

FIFO

Sales (1803.60) 648

Less: Purchases (2202.40) 528

Income tax 144

Cash Balance (24)

LIFO
 $

Sales 648

Less: Purchases 528

Income tax 108

Cash Balance 12

Both companies have 240 units in ending inventory @ 2.40 per unit; value $ 576.Cash position
of the two firms is important. The LIFO Company has $ 12 in hand while FIFO Company with a
high income has dipped into bank overdraft to pay its income tax.

E-9

Table
Items Original Replacement Floor Ceiling Market Lower of
cost cost market or
cost
$ $ $ $ $ $
Delta o.67 o.62 o.6 0.68 0.62 o.62
Sigma 2.20 2.12 2.02 2.1 2.1 2.1
Beta 0.19 0.20 0.20 0.21 0.20 0.19
Nu 0.93 0.87 0.88 0.92 0.88 0.88
Ans

E-10

1) Cost of ending inventory(FIFO)

$
25 Units @ 87 = 2175
2) Cost of ending inventory (FIFO: COST OR MARKET, WHICH EVER IS LOWER)
$
25 Units @ 86 = 2150
3) Cost of ending inventory (Average costing)
$

25 Units @ 84 = 2100

Avg unit cost = Total cost of material / Total units of material

 = 8400 / 100

= $ 84 / units

4) Ending inventory cost (LIFO)

$
20 Units @ 80 = 1600
5 Units @ 82 = 410
2010

E-11

Table
Items Original Replacement Floor Ceiling Market Lower of
cost cost market
or cost
$ $ $ $ $ $
Marker 12000 10400 11100 15600 11100 11100
Pens 9440 8400 11100 15600 11100 9440
Highlighter 15000 15900 12800 14600 14600 14600
Ans
Working
Normal profit
Marker = 18000 25 / 100 = $ 4500
Pens = 18000 25 / 100 = $ 4500
Highlighter = 18000 10 / 100 = $ 1800
E-12

Journal Entries

$ $

a) FOH A/C 115.5

Material A/C 115.5
(Being material over cost)

Unit cost = 4200/8000 = $ 0.525

Units over cost = 8000 _ 7780

= 220 units

Value over cost = 2200.525 = 115.5

b) FOH A/C 150

W-I-P A/C 150
(Being prepaid charges to job 182)
c) Material A/C 382
W-I-P A/C 382
(Being excess material returned from factory)
d) Account payable A/C 165
Material A/C 165
(Being material returned to vendor)
FOH A/C 14
Cash A/C 14
(Being freight paid)
e) Sales returns A/C 2100
Account receivable 2100
(Being sales returns)
Finished goods A/C 1500
Cost of goods sold 1500
(Being cost of goods sold returned)
f) FOH A/C 214.50
W-I-P A/C 4600
Material A/C 4814.50
(Being issue of material)
g) Material A/C 6150
 Account payable A/C 6150
(Being material purchased)
Material A/C 70
Cash A/C 70
(Being freight on purchase of material)
h) Material A/C 150
FOH A/C 150
(Being material returned)
i) Scrap material A/C 200
Scrap sales A/C 200
(Being spoiled work received in store)
j) Spoiled work A/C 20
FOH A/C 40
W-I-P A/C 60
(Being spoiled work received in store)
k) Cash A/C 250
Scrap material A/C 200
Scrap sales A/C 50
(Being scrap material sold)
E-12
Subsidiary record
a) Inventory adjustment A/C $ 115.5 Cr.
b) Repair supplies A/C $ 150 Cr.
c)
d) Freight on purchase returns A/C $ 14 Cr.
e)
f) Supplies A/C $ 214.50 Cr.
g)
h) Supplies A/C $ 150 Dr.
i)
j) Loss on spoiled work $ 40 Cr.
k)
Inventory valuation at cost or market, which ever is lower:
Table
Items Original Replacement Floor Ceiling Market Lower of
cost cost market
or cost
$ $ $ $ $ $
Given Given Given Self Self Self Self
 calculation calculation

Floor = Sale price _ cost of completion and sale _ Normal profit

Ceiling= Sale price _ cost of completion and sale
Market= Replacement price within the range of Floor and ceiling

E-13

Req: 1

Loss charged to production

W-I-P A/C 60900

Material A/C 24000

Payroll A/C 18000

Applied FOH A/C 18900

(Being cost of work put into process)

(5005) Spoiled work A/C 2500

FOH control A/C 2575

W-I-P A/C 5075

(Being cost of spoiled work)

Finished goods A/C 55825

W-I-P A/C 55825

(Being cost of work completed)

Cash A/C 2500

Spoiled work A/C 2500

(Being sale of spoiled work)

Working (Req1)

Total cost of loss

= 60900 / 6000 500

= $ 5075

Req:2

Loss charged to job

W-I-P A/C 60000

Material A/C 24000

Payroll A/C 18000

(18000100/100)Applied FOH A/C 18000

(Being cost of work put into process)

Spoiled work A/C 2500

W-I-P A/C 2500

(Being cost of spoiled work)

Finished goods A/C 57500

W-I-P A/C 57500

(Being cost of work completed)

Cash A/C 2500

Spoiled work A/C 2500

(Being sale of spoiled work)

E-14

1) Loss charged to all production

W-I-P A/C 50,000
(40005) Material A/C 20,000
(40004) Payroll A/C 16,000
(40003.50) FOH applied A/C 14,000
(Being cost of work put into process)
Spoiled work A/C 2100
FOH control A/C 1650
W-I-P A/C 3750
(Being cost of spoiled work)
Finished goods A/C 46250
W-I-P A/C 46,250
(Being cost of goods completed)
Cash A/C 2100
Spoiled work A/C 2100
(Being sale of spoiled work)
Working
Total cost of loss
= W-I-P started / Total units started Units lost
= 50,000 / 4000 300
= $ 3750
Sale price of spoiled work
= units spoiled sale price
= 300 7
= $ 2100
2) Loss charged to production run (job)
W-I-P A/C 48,000
(40005) Material A/C 20,000
(40004) Payroll A/C 16,000
(40003) FOH applied A/C 12,000
(Being cost of work started)
Spoiled work A/C 2100
(3007) W-I-P A/C 2100
(Being cost of spoiled work)
Finished goods A/C 45900
W-I-P A/C 45900
(Being cost of goods completed)
Cash A/C 2100

Spoiled work A/C 2100

(Being sale of spoiled work)
E-15

1) Loss is charged to job:

W-I-P A/C 88000

(100040)Material A/C 40000

(1000 20)Payroll A/C 20000

(20000140/100)Applied FOH A/C 28000

(Being cost of work put into process)

W-I-P A/C 11600

(10002)Material A/C 2000

(1000 4)Payroll A/C 4000

(4000140/100)Applied FOH A/C 5600

(Being cost of rework)

Finished goods A/C 99600

W-I-P A/C 99600

(Being cost of work completed)

Req(2)

Loss charged to entire production:

W-I-P A/C 63000

(100040)Material A/C 40000

(1000 20)Payroll A/C 20000

(20000150/100)Applied FOH A/C 3000

(Being cost of work put into process)

W-I-P A/C 12000

 (10002)Material A/C 2000

(1000 4)Payroll A/C 4000

(4000150/100)Applied FOH A/C 6000

(Being cost of rework)

Finished goods A/C 63000

W-I-P A/C 63000

(Being cost of work completed)

 Problems

7-1

a) Applied acquisition cost rate

= Estimated acquisition cost/Estimated purchases100
= 18000 / 144000 100
= 12.5%
b) Applied cost = Actual purchases Applied cost rate
= 148500 12.5 / 100
= $ 18562.5
c) The actual cost of material is under cost, therefore the under applied cost of $ 362.5
(18562.5 18200) should be closed to cost of goods sold.

7-2

FIFO Costing

Date Receipts Issue Balance

June unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 200 @ 3 = 600

2 500 @ 3.20 = 1600 200 @ 3 = 600

500 @ 3.20 = 1600

7 200 @ 3 = 600 300 @ 3.20 = 960

200 @ 3.20 = 640

11 300 @ 3.30 = 990 300 @ 3.20 = 960

300 @ 3.30 = 990

14 300 @ 3.20 = 960 200 @ 3.30 = 660

100 @ 3.30 = 330

17 400 @ 3.20 = 1280 200 @ 3.30 = 660

 400 @ 3.20 = 1280

21 200 @ 3.30 = 660 400 @ 3.20 = 1280

24 300 @ 3.40 = 1020 400 @ 3.20 = 1280

300 @ 3.40 = 1020

26 400 @ 3.50 = 1400 400 @ 3.20 = 1280

300 @ 3.40 = 1020

400 @ 3.50 = 1400

29 400 @ 3.20 = 1280

200 @ 3.40 = 680

Cost of material used = Closing stock = 1740

5150

LIFO Costing

Date Receipts Issue Balance

June unit U.cost Bal unit U.cost Bal unit U.cost Bal

1 200 @ 3 = 600

2 500 @ 3.20 = 1600 200 @ 3 = 600

500 @ 3.20 = 1600

7 400 @ 3.20 = 1280 200 @ 3 = 600

100 @ 3.20 = 320

11 300 @ 3.30 = 990 200 @ 3 = 600

100 @ 3.20 = 320

300 @ 3.30 = 990

14 300 @ 3.30 = 990 200 @ 3 = 600

100 @ 3.20 = 320

17 400 @ 3.20 = 1280 200 @ 3 = 600

400 @ 3.20 = 1280

21 200 @ 3.20 = 640 200 @ 3 = 600

200 @ 3.20 = 640

24 300 @ 3.40 = 1020 200 @ 3 = 600

200 @ 3.20 = 640

300 @ 3.40 = 1020

26 400 @ 3.50 = 1400 200 @ 3 = 600

200 @ 3.20 = 640

300 @ 3.40 = 1020

400 @ 3.50 = 1400

29 400 @ 3.50 = 1400 200 @ 3 = 600

200 @ 3.40 = 680 200 @ 3.20 = 640

100 @ 3.50 = 340

Cost of material used = Closing inventory = 1580

5310

Income statement (FIFO)

Sales (1600@7) 11200

Less: Cost of goods sold 5150

Gross income 6050

Less: Marketing & Administrative expenses 2100

Income before tax 3950

Less: Income tax (40%) 1580

Net income 2370

Income statement (LIFO)

Sales (1600@7) 11200

Less: Cost of goods sold 5310

Gross income 5890

Less: Marketing & Administrative expenses 2100

Income before tax 3790

Less: Income tax (40%) 1516

Net income 2274

Cash position at the end of June

FIFO

Sales (1600 7) 11200

Less:

Purchases 6290

Marketing & Administrative expenses 2100

Income tax 1580

Cash balance 1230

LIFO

Sales (1600 7) 11200

Less:
 Purchases 6290

Marketing & Administrative expenses 2100

Income tax 1516

Cash balance 1294

7-3

Cost of ending inventory (produced with FIFO)

100 @ 12 = 1200

100 @ 14 = 1400

200 @ 17 = 3400

400 6000

Working:

No of units in ending inventory

= Opening units + Purchases _ Sold units

= 200 + 600 _ 400

= 200 units

LIFO Costing

Date Receipts Issue Balance

unit U.cost Bal unit U.cost Bal unit U.cost Bal

Jan 1 200 @ 10 = 2000

Jan12 100 @ 11 = 1100 200 @ 10 = 2000

100 @ 11 = 1100

Feb 1 100 @ 11 = 1100 100 @ 10 = 1000

100 @ 10 = 1000
Apr16 200 @ 12 = 2400 100 @ 10 = 1000

200 @ 12 = 2400

May1 100 @ 12 = 1200 100 @ 10 = 1000

100 @ 12 = 1200

July15 100 @ 14 = 1400 100 @ 10 = 1000

100 @ 12 = 1200

100 @ 14 = 1400

Nov10 100 @ 14 = 1400 100 @ 10 = 1000

100 @ 12 = 1200

Dec5 200 @ 17 = 3400 100 @ 10 = 1000

100 @ 12 = 1200

200 @ 17 = 3400

Cost of material used=4700 Ending inventory=5600

Cost of ending inventory

100 @ 10 = 1000

100 @ 12 = 1200

200 @ 17 = 3400

5600
7-4 ????
7-5

(1) LIFO: Periodic Inventory

Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 8,000 @ 16 = 128,000 12,000 @ 22 = 264,000

Total 56,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $678,000 = $314,000

Cost of goods sold = $128,000 + 240,000 + 240,000 + (7,000 x 10)

= $678,000

(2)

Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 4,000 @ 16 = 64,000 12,000 @ 22 = 264,000

Total 52,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $632,000 = $360,000

Cost of goods sold = $64,000 + 240,000 + 240,000 + 80,000 + (1,000 x 8)

= $632,000

(3)

Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 12,000 @ 16 = 192,000 12,000 @ 22 = 264,000

Total 60,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $702,000 = $290,000

Cost of goods sold = $192,000 + 240,000 + 240,000 + (3,000 x 10)

= $702,000

(4)

FIFO: Periodic Inventory

(1) Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 8,000 @ 16 = 128,000 12,000 @ 22 = 264,000

Total 56,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $640,000 = $352,000

Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)

= $640,000

(2)

Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 4,000 @ 16 = 64,000 12,000 @ 22 = 264,000

Total 52,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $640,000 = $352,000

Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)

= $640,000

(3)

Inventory January 1 4,000 @ $8 = $32,000

Purchases: Sales

First Quarter 8,000 @ 10 = 80,000 5,000 @ $16 = $ 80,000

Second Quarter 20,000 @ 12 = 240,000 16,000 @ 18 = 288,000

Third Quarter 16,000 @ 15 = 240,000 18,000 @ 20 = 360,000

Fourth Quarter 12,000 @ 16 = 192,000 12,000 @ 22 = 264,000

Total 60,000 51,000 $992,000

Gross Profit = Sales cost of goods sold

= $992,000 $640,000 = $352,000

Cost of goods sold = $32,000 + 80,000+ 240,000 + 240,000 + (3,000 x 16)

= $640,000
7-6

(1) Instant Coffee

October 1 inventory 1,200 cases

October 10 purchase 1,600

October 20 purchase 1,600

Available for sale 4,400

Less: net sales (3,400 50) 3,350

October 31 inventory 1,050 cases

Purchase price per case $57

Less: cash discount 2% 1.14

Net purchase price $55.86

Add: freight ($480/1,600) 0.30

Cost per case $56.16

Sugar

October 1 inventory 600 balers

October 5 purchase 640

October 16 purchase 640

Less: Damaged Goods (20)

October 24 purchase 640

Available for sale 2,500

Less: net sales 2,200

October 31 inventory 300 balers

Purchase price per baler $5.04

Less: freight ($320/640) 0.50

 Cost per baler $5.54

(2) Instant Coffee Sugar

Replacement cost

Most recent quoted price $56.65 per case $5.30 per baler

2% cash discount 1.13 -----

$55.52 $5.30

Freight 0.30 0.50

$55.82 $5.80

Ceiling net realizable value $60.80 $5.20

Floor net realizable value less normal markup 53.20 4.55

Market 55.82 5.20

Cost (req. 1) 56.16 5.54

Lower of cost or market 55.82 5.20*

Total inventory October 31:

Instant coffee (1,050 x $55.82) $58,611

Sugar (300 x $5.20) 1,560

$60,171

*net realizable value (ceiling) must be used for market because actual market (replacement
cost) exceeds the upper limit under the cost or market rule. Even though replacement cost
exceeds cost, cost may not be used because the upper market limit is lower than cost.

(3) The lower of cost or market procedure may be applied to each inventory items, or it may be
applied to groups of product or to the inventory as a whole. However, the procedure selected
should be consistently from period to period and the mix within a group or total inventory
should not change erratically from period to period, so that inventory value is not distorted by
mix changes.
7-7

Loss charged to job Loss charged to all production

W-I-P A/C 90400 W-I-P A/C 96000
(80005)Material A/C 40,000 (80005)Material A/C 40,000
(80004)Payroll A/C 32000 (80004)Payroll A/C 32000
(80002.30)FOH applied A/C 18400 (80003)FOH applied A/C 24000
(Being cost of work put into process) (Being cost of work put into process)

Spoiled work A/C 2400 Spoiled work A/C 2400

(6004) W-I-P A/C 2400 FOH control A/C 4800
(Being cost of spoiled work) W-I-P A/C 7200
(Being cost of spoiled work)
Finished goods A/C 88000 Working:
W-I-P A/C 88000 Total cost of loss
(Being cost of work completed) = 96000 / 8000 600 = 7200
Sale price of spoiled units
= 600 4 = 2400
Cash A/C 2400
Spoiled work A/C 2400
Finished goods A/C 88000
(Being sale of spoiled work)
W-I-P A/C 88000
(Being cost of work completed)

Cash A/C 2400

Spoiled work A/C 2400
(Being sale of spoiled work)

7-8

1) Loss charged to job

W-I-P A/C 8375
(10004) Material A/C 4000
(10001.75) Payroll A/C 1750
(1750150/100)FOH applied A/C 2625
(Being cost of work put into process)

W-I-P A/C 71.25

(750.20) Material A/C 15
(750.30) Payroll A/C 22.5
(22.5150/100)FOH applied A/C 33.75
 (Being cost of work put into process)
Finished goods A/C 8446.25
W-I-P A/C 8446.25
(Being cost of goods completed)

2) Loss charged to all production

W-I-P A/C 8550
(10004) Material A/C 4000
(10001.75) Payroll A/C 1750
(1750160/100)FOH applied A/C 2800
(Being cost of work put into process)

W-I-P A/C 73.5

(750.20) Material A/C 15
(750.30) Payroll A/C 22.5
(22.5160/100)FOH applied A/C 36
(Being cost of work put into process)
Finished goods A/C 8550
W-I-P A/C 8550
(Being cost of goods completed)