Photo AI
Stock Valuation and Flexible Budgeting Jones Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2015
Question 8
Stock Valuation and Flexible Budgeting Jones Ltd is a retail store that buys and sells one product. The following information relates to the purchases and sales of ... show full transcript
Worked Solution & Example Answer:Stock Valuation and Flexible Budgeting Jones Ltd is a retail store that buys and sells one product - Leaving Cert Accounting - Question 8 - 2015
Step 1
Calculate the value of closing stock using ‘First in/First out’ (FIFO) method.
Answer
To determine the closing stock using the FIFO method, we acknowledge that the earliest purchases are sold first. Thus, we first analyze the purchases:
- Opening Stock: 5,200 units @ €6 each
- Purchases: 4,500 units @ €6, 2,400 units @ €7, 1,400 units @ €8, and 2,600 units @ €9.
- Total purchases = 10,900 units, which will be adjusted based on total sales.
Total Sales Units:
- Credit Sales: 1,200 + 1,200 + 1,400 + 1,600 = 5,400 units
- Cash Sales: 1,000 + 1,400 + 1,600 + 1,100 = 5,100 units
Total Units Sold = 5,400 + 5,100 = 10,500 units.
Now to calculate the closing stock:
- Total Available Stock = Opening Stock + Purchases - Total Sales = (5,200 + 10,900) - 10,500 = 5,600 units.
Since we sold 10,500 units, the closing stock will be determined based on the remaining stock of 5,600 units.
Closing Stock Valuation:
- We calculate the closing stock units:
- 2,600 units @ €9 each = €23,400
- 1,400 units @ €8 each = €11,200
- 1,600 units @ €7 each = €11,200
- Total Value = €23,400 + €11,200 + €11,200 = €45,800.
Step 2
Prepare a trading account for the year ending 31/12/2014.
Answer
To prepare a trading account for the year, we need to identify the sales, cost of goods sold, and resultant gross profit or loss.
Trading Account for the Year Ended 31/12/2014
Sales:
- Total Credit Sales = €24,000
- Total Cash Sales = €19,200
- Total Sales = €43,200
Cost of Sales:
- Opening Stock = 5,200 units @ €6 = €31,200
- Purchases = €73,000 (as previously calculated)
- Closing Stock = €45,800 (as calculated earlier)
- Cost of Sales = Opening Stock + Purchases - Closing Stock = €31,200 + €73,000 - €45,800 = €58,400
Gross Profit:
- Gross Profit = Sales - Cost of Sales = €43,200 - €58,400 = €60,000.
Step 3
Outline the implications of an incorrect stock valuation.
Answer
The implications of an incorrect stock valuation are significant and multifaceted:
-
Impact on Financial Statements:
- An incorrect valuation affects the balance sheet, leading to misinformation regarding asset values.
-
Profit Reporting:
- An inflated or deflated stock value affects reported profit margins, misleading stakeholders and decision-makers.
-
Cash Flow Issues:
- Misvalued stocks can lead to incorrect assumptions about cash generation, impacting financial planning and liquidity.
-
Market Perception:
- Stakeholders may lose confidence in the company if financial mismanagement is discovered, affecting share prices and investor relations.
-
Management Decision Making:
- Erroneous stock valuations lead to poor business decisions, including inventory management, pricing strategy, and operational adjustments.
In essence, accurate stock valuation is crucial for maintaining transparency and accountability.
Step 4
Prepare production overheads and other overheads into fixed and variable.
Answer
To prepare the production overheads and other overheads into fixed and variable components, we analyze the data provided:
Production Overheads:
- Variable Costs:
- High Level (8,000 units): €1,200 (variable limit calculated)
- Low Level (5,000 units): €800
- Difference: €400 = Variable Cost per Unit = €2 needed for each unit
- Fixed Costs:
- Total Production Overheads: €106,800 - (Variable Costs) = € 106,800 - (Variable component)
Other Overheads:
- Variable Costs = (Total Other Overheads)
- Fixed Costs = Difference correspondence for each unit toward each defined production level.
Thus, identifying and separating these will aid in precise budget allocations.
Step 5
Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles.
Answer
A Flexible Budget is prepared as follows:
-
Sales Calculations
- Projected Sales as per Activities = Total expected revenue based on sales units
-
Variable Costs
- Categorizing each production cost into fixed and variable percentages as discussed earlier provides clarity.
-
Total Budgetary Requirement
- Since the budget is to reflect 90%, skillfully adjusting figures according to marginal costs reveals the adjustments required.