Question 2 OR (b)
Closing stock and gross profit: FIFO and weighted average, perpetual system
12 marks
- Time to write
- About 24 minutes
- Notes
- Crux notes
Question
Question 2 OR (b) · 12 marksGiven below are the details of materials relating to certain items of M/s Raghav & Co.
| 1/1/2023 | purchases | 700 units @ Rs. 22 each |
|---|---|---|
| 1/2/2023 | purchases | 300 units @ Rs. 26 each |
| 15/2/2023 | sales | 300 units @ Rs. 33 each |
| 1/4/2023 | purchases | 400 units @ Rs. 33 each |
| 15/4/2023 | sales | 500 units @ Rs. 44 each |
| 1/6/2023 | purchases | 400 units @ Rs. 44 each |
| 15/6/2023 | sales | 460 units @ Rs. 55 each |
Find out the cost of the closing stock as on 30/06/2023, and the gross profit on that date, according to the FIFO and the weighted average method under the perpetual inventory system.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Find outFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
No opening stock is given, so it is taken as nil.
Write it in this order
- Read the data; note exactly what is asked 2 min
- 1 FIFO stores ledger and cost of goods sold 4 marks 7 min
- 2 Weighted average (perpetual) stores ledger and cost of goods sold 4 marks 7 min
- 3 Closing stock under both methods 2 marks 3 min
- 4 Gross profit under both methods 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 24 minutes for 12 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Basis of the answer
- Perpetual system. The stock record is updated at every receipt and every sale, so the cost of each sale is found on the day it is made.
- FIFO assumes the units bought first are sold first, so the closing stock is made up of the latest purchases.
- Weighted average, perpetual (moving average). A new average rate is struck after each receipt, from the units and cost then in stock, and each sale is costed at the rate current on its date. AS 2 allows the average to be worked "as each additional shipment is received", and under the perpetual average the balance changes whenever a purchase or sale occurs. Rates are shown to four decimals; amounts are worked on the unrounded rate and shown to the paisa.
- Gross profit = sales value − cost of the goods sold. No opening stock is given, so it is nil.
Stores ledger: FIFO
| Date | Received (units @ ₹) | Issued (units @ ₹ = cost ₹) | Balance (units @ ₹ = ₹) |
|---|---|---|---|
| 1/1 | 700 @ 22 = 15,400 | 700 @ 22 = 15,400 | |
| 1/2 | 300 @ 26 = 7,800 | 700 @ 22 + 300 @ 26 = 23,200 | |
| 15/2 | 300 @ 22 = 6,600 | 400 @ 22 + 300 @ 26 = 16,600 | |
| 1/4 | 400 @ 33 = 13,200 | 400 @ 22 + 300 @ 26 + 400 @ 33 = 29,800 | |
| 15/4 | 400 @ 22 + 100 @ 26 = 11,400 | 200 @ 26 + 400 @ 33 = 18,400 | |
| 1/6 | 400 @ 44 = 17,600 | 200 @ 26 + 400 @ 33 + 400 @ 44 = 36,000 | |
| 15/6 | 200 @ 26 + 260 @ 33 = 13,780 | 140 @ 33 + 400 @ 44 = 22,220 |
Cost of goods sold (FIFO) = 6,600 + 11,400 + 13,780 = ₹31,780; closing stock 540 units = ₹22,220.
Stores ledger: weighted average (perpetual)
| Date | Received (units @ ₹) | Issued (units @ rate = cost ₹) | Balance (units, ₹, rate) |
|---|---|---|---|
| 1/1 | 700 @ 22 = 15,400 | 700 units, 15,400, rate 22.0000 | |
| 1/2 | 300 @ 26 = 7,800 | 1,000 units, 23,200, rate 23.2000 | |
| 15/2 | 300 @ 23.2000 = 6,960 | 700 units, 16,240, rate 23.2000 | |
| 1/4 | 400 @ 33 = 13,200 | 1,100 units, 29,440, rate 26.7636 | |
| 15/4 | 500 @ 26.7636 = 13,381.82 | 600 units, 16,058.18, rate 26.7636 | |
| 1/6 | 400 @ 44 = 17,600 | 1,000 units, 33,658.18, rate 33.6582 | |
| 15/6 | 460 @ 33.6582 = 15,482.76 | 540 units, 18,175.42, rate 33.6582 |
Cost of goods sold (weighted average) = 6,960 + 13,381.82 + 15,482.76 = ₹35,824.58; closing stock 540 units = ₹18,175.42.
Closing stock and gross profit on 30 June 2023
| Particulars | FIFO ₹ | Weighted average ₹ |
|---|---|---|
| Sales (300 @ 33 = 9,900; 500 @ 44 = 22,000; 460 @ 55 = 25,300) | 57,200 | 57,200 |
| Less: cost of goods sold | 31,780 | 35,824.58 |
| Gross profit | 25,420 | 21,375.42 |
| Closing stock, 540 units | 22,220 | 18,175.42 |
Check: purchases ₹54,000 (15,400 + 7,800 + 13,200 + 17,600) = cost of goods sold + closing stock under each method (31,780 + 22,220; 35,824.58 + 18,175.42). Prices rose through the period, so FIFO, which keeps the latest costs in stock, shows the higher closing stock and the higher gross profit; the gap is ₹4,044.58 in both.
Where the 12 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | FIFO stores ledger and cost of goods sold | 4 |
| 2 | Weighted average (perpetual) stores ledger and cost of goods sold | 4 |
| 3 | Closing stock under both methods | 2 |
| 4 | Gross profit under both methods | 2 |
| Total | 12 |
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