Phew! ECR done

Laura Cameron

Xplosive wrote: »

I know this is getting on a bit now but im still baffled by one part of the exam :001_tt2:

Section one, the Stock record card, In the working part underneath the SRC i drew up two draft stock record cards and two profit and loss accounts (upto gross profit) so that i could complete both stock cards with Avco and Fifo and then see how resulting closing stock figures affected the profit. And this took me about 20/30 minutes :blushing: But i eventually came to the stock method with the highest profit being Avco. As in that paticular example it had the highest closing stock figure and thus highest profit.

Now, i already know i have it wrong and the answer was infact Fifo as put by virtually everyone else :laugh: But is anyone able to explain why this is?

Many thanks :thumbup1:

hi,

Fifo is always the highest and lifo the lowest avco always falls somewere inbetween.

I did a few quick workings and fifo was closing stock was around 68?? and lifo was around 64?? .... the only way really was to work it out each method.... If you did Avco though then did hte stock record card correctly using avco you will still gain some marks here...

hope this helps a bit xx

CJC77

Xplosive wrote: »

I know this is getting on a bit now but im still baffled by one part of the exam :001_tt2:

Section one, the Stock record card, In the working part underneath the SRC i drew up two draft stock record cards and two profit and loss accounts (upto gross profit) so that i could complete both stock cards with Avco and Fifo and then see how resulting closing stock figures affected the profit. And this took me about 20/30 minutes :blushing: But i eventually came to the stock method with the highest profit being Avco. As in that paticular example it had the highest closing stock figure and thus highest profit.

Now, i already know i have it wrong and the answer was infact Fifo as put by virtually everyone else :laugh: But is anyone able to explain why this is?

Many thanks :thumbup1:

I tried to think of it as how the economy works - invariably as time goes on - the cost of an item increases. If you use the FIFO method, then all your 'costs' are a lower amount (Think back to how your profit and loss sheet worked in the FRA exam).

Sales less cost of sales = gross profit

If your sales figure was £20,000, what 'cost of stock' would you be best deducting to get a higher figure? Those purchased earlier at the lower cost, those purchased last at the higher cost, or an average of the two? Surely the less 'costs' you have to deduct - the higher the remaining profit will be.

Does that help?

Bluekasi

@laura cameron.. (FIFO) you issue out stock u received first (at first price cost- prices that you bought stock for-(always lower when cost prices are increasing), you then remain with the stock that you recently purchased( at higher price costs) effectively meaning the balance on your stock ledger which is rightly valued at recent prices( because u bought it with recent or latest cost prices) gives u the highest closing/balance stock per unit compared to other methods. LIFO gives u the lowest stock valuation because you issue out( to WIP or Sales) the stock that u recently bought (remember its more expensive) leaving u with a balance of stock that u bought'received first( which cost less).. this valuation method is not allowed/recommended by HMR& C for taxation purposes because they say it understates profits. Also like somebody said, when dealing with perishable goods stock u cant use LIFO (issueing out the last receipt n leaving in stock the goods/stock that u bought/recievd first).. AVCO is sandwichd btwn the two.. its self-explainatory- Weighted average cost means between or the mean of the first recievd stock costs and later reciepts.

Bluekasi

i wrote over-absorption/recovery not under-absorption. i then credited the over-absorption value to profit & loss (it increases the income- jus like the abnormal gain).. in the process account the cost per tonne for both output-360t and abnormal loss 28t is 190 pounds. abnormal loss jus like abnormal gain should be costed at output cost per unit.. simply put, output cost per unit which is a tonne in this case, is input cost minus proceeds from scrap sales of normal loss divided by excpected output (388 tonnes; input less normal/expected loss;400-12).. credit entries in the output side; that is normal loss sale proceeds(think it was $240), output at 360t X $190 plus abnormal loss 28 X $190 all equals 73720 pounds which is a balance on the debit side( total imput costs)

i see that many people wrote under-absorbtion. i stand to be corrected

CJC77

[QUOTE=Bluekasi;151781........Also like somebody said, when dealing with perishable goods stock u cant use LIFO (issueing out the last receipt n leaving in stock the goods/stock that u bought/recievd first).. AVCO is sandwichd btwn the two.. its self-explainatory- Weighted average cost means between or the mean of the first recievd stock costs and later reciepts.[/QUOTE]

Why do so many people get the wrong idea about using LIFO. Fifo, Lifo and Avco are purely a way of recording the receipts and issues to give a resulting figure - IT DOES NOT MEAN YOU PHYSICALLY HAVE TO USE THE GOODS THAT WERE PURCHASED AT THAT PRICE!!!

If you bought potatoes, you could still charge their cost using the LIFO method. A potato is a potato whenever you bought it. Just because you record the costs using LIFO doesn't mean you actually distribute the newest ones first....Equally just because you record them using AVCO doesn't mean you take 50% of the older potatoes and 50% of the newer potatoes for distribution - You are taking the costing method far too literally!

whos that girl

Night before the exam i read my tutorial and when i done the Stock valuation card i remember that it said FIFO gave the higher of stock evaluation as it uses the stock first which has a higher value as its the newest. The older the stock the more value it loses. So lifo would give a lesser figure and avco is average. I also read somewhere that if you are asked to find the method in the stock card and give answers to say, 4 decimals, then this is usually a sign that AVCO method used. So when i read the question and it asked me to used the method that would give the highest , i cant remember exactly what the question said now but straight away i thought fifo. hope this helps alittle at least.