Budgeting (AQ 2013) - Sample Assessment 1, Task 1.3 (b)

thebigalbowski

Hello all. I am wondering if somebody could help me with Task 1.3 (b) with regards to Sample Assessment 1 for Budgeting. My mind has gone blank.

In the Operating Budget, the 'Closing inventory of finished goods' is £179,080 and the Cost of goods sold is £1,266,720. How are these both worked out?

Thank you for your help

SandyHood

You need to establish whether FIFO or AVCO is being used to value the inventory.
I think this question says cost of purchases should be used. In other words, the opening inventory value is used in production along with some of the purchased inventory and all the closing inventory is valued at the cost per unit purchased in the period.

Does that make sense?
Sandy
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SandyHood

To find cost of goods sold you add up the values for opening inventory and purchases, and take off the closing inventory. This approach works whether FIFO or AVCO is used.
Sandy

thebigalbowski

Hi Sandy

Yes, this makes sense. Thank you very much for your help

Patricia

Hi,

Did you find out how to get the closing inventory of 'Closing inventory of finished goods' is £179,080? I am having a blackout, very stuck on this one. Any help is appreciated. Thank you :-)

SandyHood

Patricia

1. work out the purchase cost per kg (or litre)
   
2. find the physical number of kgs in the closing inventory
   
3. multiply the number of kgs by the cost per kg
   

Patricia

Sandy, thank you
Please see below how I did:
purchase price: 598000/460000=1.3
closing inventory of finished goods = 81,400 x1.3=105820
material closing inventory = 68250 x1.3= 88725
Still not getting £179080, can you please show me what I am doing wrong?

SandyHood

Patricia

Don't muddle up raw materials with finished goods.
Look at your posting. How can finished goods be worth the same per unit as materials that haven't been worked on?
Finished goods inventory is valued using cost of production.
Unlike you I cannot access the questions, but I recall there being a small print note that closing inventory of finished goods was valued using the cost per unit produced.
Look at all the cost of production inputs: materials, labour and overheads and add them up. Then divide by the number produced. This gives you the cost of production on a per unit basis.
Find the closing inventory of finished goods (in units) and multiply by the cost per unit.

Komal

i think its (total production cost / budgeted production level) x budgeted closing inventory of finished goods
1295800/589000 = 2.2 x 81400
= £179080

cost of sales then will be = 150000+1295800-179080= 1266720