Managing Cost and Finance MA 2 Ibrahim Hameem

Managing Cost and Finance MA 2 Ibrahim Hameem (CIMA exam complete, ACCA professional level student, Diploma in Economics (distinction) , Third year undergraduate reading for BSc. Mathematics and Economics (university of London)

Cumulative weighted average Every time units are added, a new average price is calculated. Any time goods are removed they are removed at the prevailing average. • 12 March 20 X 4: buy 1000 units at $5 each • 21 March 20 X 4: buy 500 units at $6 each • 31 March 20 x 4: ! sell 800 units at $12 each. • Note: Sales do not alter the average cost. • Receipts and sales are handled on a strict time basis.

Periodic weighted average • Periodic weighted average Here, a new inventory value is calculated at the end of a set period. The cost of goods used is given by: • So, all units used in the period will have the same cost. In the above simple example this method would give the same result as the cumulative weighted average approach

Question 01 • Can the periodic or cumulative weighted average method used to manipulate closing inventory values during times of inflation or deflation? • No, not necessarily

Illustrations Calculate the cost of inventory used each time and the cost of the inventory remaining at the end of the period using: a)FIFO b)(b) LIFO

Answer to illustration • FIFO Sale of 200 on 9 April: assumed to be units from opening inventory: 200 @ $5 = $1, 000 Sale of 1, 200 on 21 April: assumed to be the 800 remaining from opening stock plus 400 from the purchase on 5 April: 800 @ $5 + 400 @ $6 = $6, 400 Closing inventory will be all the 600 purchased on 14 April plus 100 left from the 5 April purchase = 600 @ $5. 50 + 100 @ $6. 00 = 3, 900.

LIFO • Sale of 200 on 9 April: assumed to be units purchased on 5 April: 200 @ $6 = $1, 200 • Sale of 1, 200 on 21 April: assumed to be the 600 from the purchase on 14 April (600 x 5. 5 = $3, 300) plus 300 remaining from the purchase on 5 April: 300 @ $6 = $1, 800, plus 300 from opening stock @$5 = $1, 500. Total cost of those sales = $6, 600 • Closing inventory will be all from opening stock: 700 @ $5. 00 = $3, 500

Question 02 • In the previous illustration, why does FIFO give a higher closing stock value than LIFO? Because the price of raw materials are increasing

Illustrations Calculate the cost of inventory used each time and the cost of the inventory remaining at the end of the period using: a)Cumulative weighted average method

Answer

Question 03 • The cumulative weighted average method is disallowed by IAS 2 inventories. True or false? • False