Tutorial 6 FA IV

Question 1

Gagasan Sdn Bhd manufactures and sells office furniture. The following figures relate to the
company's inventories of finished goods held at the year ended 30 September 2020:

The above information given is based on per unit basis.

The number of units held as inventory as at the financial year end are 120 units and 300 units
respectively.

Required:
(a) Calculate the value of the inventories held at the financial year end which can be used for
inclusion in the final accounts of Gagasan Sdn Bhd.

Office Table RM Office Chair RM

Cost: Cost:
Direct materials 90 Direct materials 84
Direct labour 72 Direct labour 60
Production 120 Production 132
overheads overheads
282 276

NRV: NRV:
Selling price 360 Selling price 420
Less: transport -60 Less: transport -72
Less: marketing -42 Less: marketing -30
258 318
Value of this item is 258 Value of this item is 276

Inventories held at the financial year end

= RM258 X 120 unit + RM276 x 300 unit
= RM30,960 + RM82,800 = RM113,760

(b) Comment on the basis on which you have worked out the inventories values in (a) explaining
clearly the rules you have adopted and whether they are in accordance with any acceptable
accounting principles or any appropriate accounting standards.
 ACCRUAL CONCEPT (P9 IAS2), NET REALISABLE VALUE
The fundamental requirement of MFRS 102 Inventories is that inventories should be
valued at the lower of cost and net realisable value.

In line with MFRS102, the cost of inventories should comprise all costs of purchase,
costs of conversion and all other costs incurred in bringing the inventories to their
present location and condition.
For the above products, the costs of conversion include the production overheads, direct
materials and direct labour costs which made up of the costs of inventories.

Net realisable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.
The net realisable value of the above product is therefore selling price less transport
costs and marketing costs.

Comparison between cost and net realisable value is made within the two items and the
lower value taken as valuation in line with the separate valuation principle.

Question 2
Mulberry Sdn Bhd manufactures a fashionable product, Zee which it sells for RM1,200 each.
Costs of conversion for the finished product were:
Fixed production overheads were RM1,400,000 per annum and out of which RM80,000 were due to
abnormal wastages and idle time.

One third of the administrative expenses of RM360,000 were incurred in connection with the
production function. The normal capacity level is expected at 12,000 units per annum.

At 31 December 2020, there were 2,200 units of product Zee in the closing inventories. This included
100 defective units which require modification. Modification cost is expected at RM120 each. After
modification, they can be sold for RM1,000 each.

The selling cost of each unit is RM100.

Required:
(a) Calculate the cost of producing one unit of product Zee.

RM’000
Production overheads 1,400
Less: wastage & idle time -80
1320
Add: administrative expenses related to production (1/3 x 360) 120
1440

Cost per unit of finished goods RM per unit

Direct materials 600
Direct labour / variable overheads 180
Production overheads [RM1,440,000 / 12,000 unit] 120
900

(b) Calculate the value of the closing inventories as at 31 December 2020.

Value of closing inventories as at 31 December 2020

Good condition goods Defective goods

Quantity held 2,100 100
RM RM
Cost per unit 900 900
Net realisable value per
unit
Estimated selling price 1,200 1,000
Modification costs - -120
Selling costs -100 -100
1,100 780

Value of closing inventories as at 31 December 2018

= (2,100 x 900) + (100 x 780) = RM1,968,000

(c) Explain the accounting principle used in the valuation of closing inventory.

ACCRUAL CONCEPT AND PARA 23, NPV 780

 MFRS102 requires inventory to be measured at the lower of cost and net realisable
value. When the cost of the inventory exceeds the probable future economic benefits
expected from the sale of the inventory, the inventory has to be written down to its net
realisable value.
This is consistent with the prudence concept which requires an enterprise to recognise
all losses it can reasonably expect. IAS2 requires any such write-down of inventories to
net realisable value be recognised as an expense in the period the write-down occurs.

Question 3
(a) Define the term ‘Inventories’ as stated under MFRS102 Inventories. – Lecturer Notes

(b) Explain the following inventories valuation techniques as stated in MFRS102:

(i) FIFO – Lecturer Notes

(ii) Weighted average methods

The average cost method is based on the assumption that all the goods are commingles and it is
impossible to determine which goods and its related costs are sold and which are retained in the
inventories. The inventories are, thus, priced on the basis of average prices paid for the goods,
weighted according to the quality purchased at each price.

c) For each of the following scenario, calculate the cost as per MFRS102.

(i) Yeong Meh Meh Sdn. Bhd is a trading company dealing with electronic guitars. The information
regarding unit cost is provided as follows:

Required:
Calculate the total purchase costs of the 50 electronic guitars.
The valuation of closing inventories is as follows:

Purchase price of electronic guitar consists of:

RM
Invoice price 1000
Import duties 100
Handling fees 300
Other directly related charges 400
Less: Trade discount rebates -200
Total purchase cost per electronic guitar 1600

Total purchase cost of the electric guitar is:

50 electronic guitars x RM1600 =RM80000

(ii) Some modifications have been made on the electronic guitars before they are being marketed to
suit local taste and preference.
The following information on modifications is provided:

Required:
Recalculate the closing inventories of the electronic guitars after taking into account of the necessary
modification costs.

Cost of inventories consist of:

- Purchase cost
- Conversion cost
- Cost incurred to bring the products into its current condition and location – P15

Therefore, the valuation of closing inventories are:

RM
Purchase price cost of electronic guitar 1600
Direct cost of modification 250
Special handling cost for electronic guitar 20
Total cost 1870

P 16 SAY CANNOT ( THIS ARE NOT THE COST ) Wastage and inefficiency cost due to
inexperienced labour, General administration cost, Salary of general secretary, Commission of
salesman.

Note: The following costs are excluded from the calculation according to IAS 2:
Wastage and inefficiency cost due to inexperienced labour 30
General administration cost 50
Salary of general secretary 20
Commission of salesman 80

The valuation of closing inventories for the electronic guitar is: RM1870 x 50 units = RM93,500

(d) Why do you think inventories valuation is important?

Inventories valuation is important to show a true and fair view of the inventories figure
in the financial statement. The importance of it could be basically analysed or viewed
from the following perspectives:

- Statement of financial position: Closing inventories tend to be overstated to show a

rosy picture of the asset of a company.

- Statement of profit or loss: A high closing inventories would overstate profit figure.
This is particular true especially when a company failed to achieve the targeted profit
figure. Manipulation of closing inventories is a means of window dressing the profit
figure.
Question 4
(a) Define the term ‘cost of inventories’ and 'net realisable value'. – Lecturer notes
 (b) State THREE (3) circumstances where the net realisable value of inventories can be lower
than cost.

Any three of the following situations:

- damage physical deterioration in condition of inventory. Wear and tear
- obsolescence of products. Outdated / slow moving
- increase in cost or fall in selling price due to change in demand.
- as part of company’s marketing strategy to manufacture and sell products at a loss.
- errors in production or purchasing

(c) Calculate the total cost of finished goods inventories in accordance with MFRS102
Inventories from the following data relating to United Sdn. Bhd. for the year ended 31 March
2020:

There were 235,000 units in finished goods inventories at the year end. There were no
finished goods and work in progress at the beginning of the year.

The normal annual level of production is 750,000 can openers, but in the year ended 31
March 2020 only 500,000 were produced because of a labour dispute.

Total cost of finished goods inventory:

RM
Direct material cost per unit RM2.0 x 235,000 units = 470,000
Direct labour cost per unit RM1.5 x 235,000 units = 352,500
Direct expense per unit RM1.0 x 235,000 units = 235,000
Production OH p.a. RM600,000 / 750000 x 235000 = 188,000
1,245,500

Question 5 [2006 April Q5]

(a) In the context of MFRS 102 Inventories, define the following terms: -

(i) Inventories
(ii) Net realisable value

-LECTURER NOTES-

(b) Black Pitt Sdn. Bhd. is a manufacturing company. After its year end physical stock take, a
valuation cost of RM180,000 for the total inventories held as at the year end has been derived by the
company in accordance to MFRS 102.

However, on checking the figures, the following facts are discovered by the financial controller:
(i) One of the inventory sheets that has a sub total value of RM9,290 has been carried
forward to the next sheet as RM9,920.
 (ii) The stock take excludes a number of free samples from potential suppliers which is
currently in the purchasing department. The estimated value for the samples is RM8,260.

(iii) 325 units of inventory costing RM0.80 each have been carried into the total value column
at RM8.00 each.

(iv) The stock count includes RM6,822 of goods bought on credit and still not paid for as at
the year-end.

(v) The stock count includes also damaged goods which originally cost RM2,328. These
could be repaired at a cost of RM921 and subsequently sold for RM3,600.

(vi) The stock count excludes 400 units of goods, originally cost RM5.00, to a customer on a
sale or return basis at a price of RM8.00. The customer has not yet indicated to Black Pitt
Sdn Bhd whether these goods have been accepted or will eventually be returned.

Required:
Calculate the closing inventory figure for inclusion in the annual accounts of Black Pitt Sdn. Bhd.,
making whatever adjustments you consider necessary in view of items (i) to (vi) above. Explain your
treatment of each item.

Inventory adjustments (all figures in RM)

Adjustment
Item Explanation + -
i. The sub total error has over-valued inventories by RM 630
(9920-9290)
ii. Free samples received are not trading items and - -
should be excluded from the valuation
iii. This arithmetical error has over-stated the item by 2340
RM(8.00 – 0.80) per unit for 325 units
iv. Goods held should be included in the valuation - -
regardless of whether or not they have been paid for
yet.
v. Cost RM2328. NRV RM(3600 – 921) = RM2679. The - -
inventory should be valued at the lower of cost or
NPV. Since the cost is lower, no adjustment is
required.
Inventory issued on sale or return and not yet accepted 2000
should be included in the valuation and valued at the
lower of cost or NPV, here at RM5 each (cost)
2000 2970

Original valuation of inventories, at cost 180,000

Adjustments and corrections:
To increase valuation 2000
To decrease valuation -2970 -970
Valuation of inventories for the annual accounts 179030