PRACTICE QUESTIONS 10

AL-Falah Ltd. is a manufacturing concern which produces and sells a product ALPHA.
Purchase of raw material is made in pre-determined quantities of 1000 tons at the start of each week.

Information relating to purchases of raw material is as follows

Quarter1 Quarter 2 Quarter 3 Quarter 4

Purchase price (Per ton) 100 120 140 150
Customs duty (Per ton) 15 15 15 15
General sales Tax (% of pur price) 15% 15% 15% 15%
Freight Inward (Per ton) 20 30 25 35

Production during the year was 50,000 tones and there was a normal capacity to produce 60,000 tones.

Details of other costs incurred are as follows:

Rs.
Labour costs 1,000,000
Packing Material (Production Cost) 800,000
Production Supervisor's salary 100,000
Godown rent 260,000
Power charges 580,000
Other fixed overheads 300,000
Salary of sales workforce 400,000
Delivery cost 40/ ton

Each unit of finished goods of the product is sold at Rs. 300.

There was no opening stock and at the year-end there were 5,000 units of raw material and 2000
units of finished goods in inventory

Required
Find out the value of finished goods inventory on weighted average basis

SOLUTION

Quarter 1 Quarter 2 Quarter 3 Quarter 4

1,300,000 1,560,000 1,820,000 1,950,000
Purchase price (Per ton)
13,000 X 100 13,000 X 120 13,000 X 140 13,000 X 150
195,000 195,000 195,000 195,000
Customs duty (Per ton)
15 X 13,000 15 X 13,000 15 X 13,000 15 X 13,000
195,000 234,000 273,000 292,500
General sales Tax (% of pur price)
1,300,000 X 15% 1,560,000 X 15% 1,820,000 X 15% 1,950,000 X 15%
260,000 390,000 325,000 455,000
Freight Inward (Per ton)
13,000 X 20 13,000 X 30 13,000 X 25 13,000 X 35
1,950,000 2,379,000 2,613,000 2,892,500

9,834,500

Total 52 Weeks in a year

1000 Tons / Week
52,000 Tons
4 Quartes
13,000 Tons/Quarter

Per Unit
Material Cost ( 9,834,500 / 52000 ) 189.125
Labour Cost ( 1,000,000 / 50,000 ) 20
Packing Material (800,000 / 50,000 ) 16
Production Supervisor's salary (100,000 / 60,000 ) 1.66
Power charges ( 580,000 / 50,000 ) 11.6
Other fixed overheads (300,000 / 60,000 ) 5
243.385

Fixed cost / Normal capacity which is 60,000

Varible cost / Actual Production which is 50,000

Cost ( 243.39 X 2000 ) 486,780

We know that inventories are measured at lower of Cost and NRV

NRV
Selling price 300/Unit (300 X 2000) 600,000
Less: Delivery cost 40/Ton (2000 X 40) (80,000)
Less: Estimated cost necessary to make sales (0)
Net realizable value 520,000

Value of finished goods inventory on weighted average basis = 486,780