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Stock Valuation Bolger Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2021
Question 8
Stock Valuation Bolger Ltd is a retail store that buys and sells one product. The following information relates to the purchases and sales of the firm for the year ... show full transcript
Worked Solution & Example Answer:Stock Valuation Bolger Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2021
Step 1
Calculate the value of closing stock at 31/12/2020 using First In/First Out (FIFO)
Answer
To calculate the closing stock under the FIFO method, we need to determine the units sold during the year and then infer the remaining stock.
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Sales Calculation: The total purchases for the year are:
- From January to April: 4,500 units @ €5 each = €22,500
- From May to August: 3,600 units @ €8 each = €28,800
- From September to December: 2,600 units @ €7 each = €18,200
- Total Purchases = 4,500 + 3,600 + 2,600 = 10,700 units
- Total Sales = 2,800 units (from credit) + 3,600 units (from cash) = 6,400 units sold.
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Closing Stock Calculation:
- Opening stock: 4,700 units
- Purchases: 10,700 units
- Units sold: 6,400 units
- Closing stock = Opening stock + Purchases - Sales = 4,700 + 10,700 - 6,400 = 8,000 units
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Stock at Closing: The closing stock of 8,000 units will consist of:
- The remaining from the purchases in order of acquisition (FIFO).
- First 2,600 units from the last purchase at €7 each: 2,600 * €7 = €18,200.
- Next, 5,400 units will be from the second purchase at €8:
- 5,400 units (5,400 at €8) = 5,400 * €8 = €43,200.
- Total Closing Stock Value = €18,200 (from last purchase) + €43,200 (from second purchase) = €61,400.
Step 2
Prepare a trading account for the year ending 31/12/2020
Answer
The trading account is prepared to show the gross profit for the year based on the opening stock, purchases, and sales.
Trading Account for the Year Ending 31/12/2020
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Sales:
- Opening Stock: €22,500
- Purchases: €69,500
- Closing Stock: €61,400
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Calculation:
- Gross Profit = Sales - Cost of Goods Sold
- Cost of Goods Sold = Opening Stock + Purchases - Closing Stock
Cost of Goods Sold Calculation:
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Opening Stock: €22,500
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Purchases: €69,500
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Less Closing Stock: €61,400
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Cost of Goods Sold = 22,500 + 69,500 - 61,400 = €30,600
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Sales Revenue = €90,650
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Gross Profit Calculation:
- Gross Profit = €90,650 - €30,600 = €60,050
Step 3
Calculate the overhead absorption rates for each department
Answer
To calculate the overhead absorption rates for each department, we divide the budgeted overheads by the total budgeted direct labour hours for that department.
Overhead Absorption Rates Calculation
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Manufacturing:
- Budgeted Overhead = €840,000
- Budgeted Labour Hours = 42,000 hours
- Overhead Absorption Rate = €840,000 / 42,000 = €20.00 per Direct Labour Hour.
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Assembly:
- Budgeted Overhead = €389,400
- Budgeted Labour Hours = 22,000 hours
- Overhead Absorption Rate = €389,400 / 22,000 = €17.70 per Direct Labour Hour.
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Finishing:
- Budgeted Overhead = €187,000
- Budgeted Labour Hours = 8,500 hours
- Overhead Absorption Rate = €187,000 / 8,500 = €22.00 per Direct Labour Hour.
Step 4
Calculate the selling price of Job Number 667
Answer
To calculate the selling price for Job Number 667, we must account for the direct materials, direct labour, and overhead costs. This should also consider an added profit margin of 20%.
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Direct Materials:
- Weight of materials: 45 kg @ €12.20 per kg = €549.00
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Direct Labour:
- Manufacturing = 24 hours * €20.00 = €480.00
- Assembly = 8 hours * €16.00 = €128.00
- Finishing = 2 hours * €18.50 = €37.00
- Total Direct Labour = €480 + €128 + €37 = €645.00
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Overhead Absorption (using calculated rates):
- Manufacturing = 24 * €20.00 = €480.00
- Assembly = 8 * €17.70 = €141.60
- Finishing = 2 * €22.00 = €44.00
- Total Budgeted Overhead = 480 + 141.60 + 44 = €665.00
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Total Costs for Job Number 667:
- Direct Materials + Direct Labour + Overheads = €549 + €645 + €665 = €1859
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Selling Price:
- Selling Price = Total Costs + 20% Profit Margin = €1859 + (0.20 * €1859) = €1859 + €371.80 = €2230.80.
Step 5
Calculate departmental overhead absorption rates for Departments A, B and C
Answer
To determine the departmental overhead absorption rates, we divide the budgeted overhead costs of each department by their respective total direct labour hours.
Departmental Overhead Absorption Rates Calculation
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Department A:
- Budgeted Overhead = €234,000
- Direct Labour Hours = 14,000
- Overhead Absorption Rate = €234,000 / 14,000 = €16.71 per hour
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Department B:
- Budgeted Overhead = €664,800
- Direct Labour Hours = 54,000
- Overhead Absorption Rate = €664,800 / 54,000 = €12.30 per hour
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Department C:
- Budgeted Overhead = €88,400
- Direct Labour Hours = 26,000
- Overhead Absorption Rate = €88,400 / 26,000 = €3.40 per hour.
Step 6
Show the under/over absorption by department and in total for the period and explain what these figures mean
Answer
Under and over absorption can be analyzed using the budgeted and actual costs for each department. This helps indicate the financial efficiency of each department.
Under/Over Absorption Analysis
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Department A:
- Actual Overhead = €262,500
- Budgeted Overhead = €234,000
- Under/Over Absorption = €262,500 - €234,000 = €28,500 over.
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Department B:
- Actual Overhead = €99,200
- Budgeted Overhead = €664,800
- Under/Over Absorption = €99,200 - €12.30 * 50,000 = €26,800 under.
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Department C:
- Actual Overhead = €96,560
- Budgeted Overhead = €88,400
- Under/Over Absorption = €96,560 - €88,400 = €8,160 over.
Total Under/Over Absorption:
- Total Over Absorption = (Over for dept A + Over for dept C - Under for dept B) = 28500 + 8160 - 26800 = €9,860 over.
Explanation:
These figures indicate how well each department is managing their overhead costs. Over absorption suggests a department is using resources more efficiently than expected, whereas under absorption indicates a deviation from the budgeted expectation, suggesting either underperformance or an increase in operational costs.