UNIVERSITY OF THE WEST INDIES

Mona School of Business & Management

ACCT 1003 - Intro. to Cost & Management Accounting

Worksheet 2: Inventory Valuation and Control

Lecture Questions
Question 1
Hyatt Magic carries an inventory of putters and other gulf clubs. Hyatt uses the FIFO method and a
perpetual inventory system. Company records indicate the following for a particular line of Hyatt Magic
putters:

Date Item Quantity Unit Cost

November 1 Balance…………. 5 $70
November 6 Sale……………… 3
November 8 Purchase…………. 10 $79
November 17 Sale………………. 4
November 30 Sale………………. 5

i) Prepare a perpetual inventory record for the putters using the FIFO method. What amounts
would Hyatt report for ending inventory and cost of goods sold?
ii) Assume that Hyatt Magic uses the LIFO method of inventory costing, what would be the cost
of ending inventory and cost of goods sold?
iii) Prepare Hyatt Magic perpetual inventory record assuming the company uses the average-
cost method. Round average cost per unit to the nearest cent and all other amounts to the
nearest dollar.
iv) After preparing the FIFO perpetual inventory record in part (i), journalize Hyatt Magic’s
November 8 purchase of inventory on account and November 17 cash sale (sale price of each
putter was $120).

Question 2

a) Leather Goods Company began the year with inventory of $50,000 and purchased $250,000
worth of goods during the year. Sales for the year are $500,000, and Leather Goods gross profit
percentage is 55% of sales. Compute the estimated cost of ending inventory by the gross profit
method.

b) See Through Inc retails hand blown glass vases and uses a perpetual inventory system. A
statement of their purchases and sales of these vases for the month of June 20X9 is given below.
June 1 Opening stock of 30 vases valued at a total cost of $27,000.
June 3 Purchased 45 vases at a cost of $980 each.
June 5 Sold 55 vases at $1,600 each.
June 6 Purchased 70 vases at $1,200 each but a trade discount of 3% was received.
June 10 Sold 60 vases for $114,000.
June 14 Purchased 80 vases at $1,100 each but additionally there was a shipping cost of
$200 per vase.
June 18 Sold 65 vases for $2,300 each.

June 23 Purchased 75 vases at a total cost of $108,750.

June 25 5 of the vases last sold were returned, as the customer purchased an incorrect
quantity.
June 27 Sold 112 vases for $280,000.
June 30 An actual count of vases was carried out which revealed that there were only 9
hand blown glass vases in the store room.
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 i) Prepare the inventory record for See Through Inc. using the LIFO method.
ii) Determine the gross profit earned by See Through Inc. for the period.
iii) State the journal entries necessary to record the transactions on June 6 & 18 under the
-perpetual inventory system
-periodic inventory system

Question 3

(i) Electronics Ltd manufactures air conditioners. It purchases 200,000 units of a particular type
of compressor part, CU30, each year at a cost of $64 per unit. Annual carrying cost (for
insurance, material handling, breakage etc) per unit is 5% of the unit purchase price. Currently
Electronics Ltd places 50 orders for 4,000 units each year and ordering costs per purchase order
are $18.

a) Calculate the current annual ordering cost.

b) Calculate the current annual carrying cost.
c) What is the current total stock administration cost?
d) Calculate the EOQ.
e) What is the minimum ordering cost?
f) What is the minimum storage cost?
g) What is the minimum total stock administration cost?
h) How much savings would Electronics Ltd. make using the EOQ policy, rather than the
current policy of purchasing 4,000 units per order.
(ii) Maximum usage for Electronics Ltd. for any one week is 1,000 units and the minimum usage
400 units. Suppliers take anywhere from 2 to 4 weeks to deliver supplies after the order is
placed. Using the EOQ policy, determine the re-order level, minimum level & maximum level of
inventory.

Tutorial Questions
Question 1

Hobart Sign Company began the month of June with an inventory of 50 signs that cost a total of
$1,500. Hobart purchased and sold merchandise on account as follows:

June 3 Purchase ……………………………….. 60 signs @ $35 each

June 8 Sale …………………………………….... 100 signs @ $60 each
June 18 Purchase ……………………………….. 90 signs @ $40 each
June 28 Sale …………………………………….... 70 signs @ $70 each
Hobart uses the FIFO cost method. Cash payments, on account, totaled $5,000. Operating expenses
were $2,700; Hobart paid two-thirds in cash and accrued the rest as Accounts Payable.

i) Prepare a perpetual inventory record, at FIFO cost, for this merchandise.

ii) Make journal entries to record the company’s transactions
iii) Prepare an income statement for Hobart Sign Company for the month ended June 30.

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Question 2
Classique Designs sells a variety of merchandise, including school shoes for girls. The business
began the last quarter of 2013 with 30 pairs of the “Aerosoles” brand at a total cost of $54,000.
The following transactions, relating to the “Aerosoles” brand were completed during the quarter:
October 3 Purchased 45 pairs of shoes at a cost of $1,900 each.
October 15 Sold 55 pairs to Casually Elegant Ltd at a unit price of $2,780
October 26 Purchased 70 pairs at a cost of $2,400 each but these were subject to a trade
discount of 5%.
November 10 Sold 60 pairs to Best City Store which yielded total sales revenue of $192,000.
November 14 Owing to an increased demand for this brand, the manager of Clasique purchased 80
additional pairs of the “Aerosole” brand at a unit cost of $2,500, but additionally
there was freight charge of $100 on each pair.
November 24 Sold 60 pairs of shoes to Big Buy Company at a price of $3,600 each.
November 30 A physical stock count on that date revealed that there were 42 pairs of the
“Aerosoles” brand in the warehouse.
December 4 Purchased 75 pairs of shoes at a total cost of $213,750.
December 15 5 pairs of the shoes purchased on December 4 were returned to the supplier as they
were of the wrong description.
December 30 Sold 70 pairs to Regal Ltd. at a unit selling price of $4,400.
All purchases were on account and received on the dates stated and Classique Designs uses the FIFO
method to account for inventory.
Required:
i) Prepare a perpetual inventory record for Classique Designs, to determine the value of
ending inventory at December 31, 2013, and the total amount to be assigned to cost of goods
sold for the period.
ii) Given that selling, distribution and administrative costs for the quarter were $32,500, $14,900
and$72,100 respectively, prepare an income statement for Classique Designs for the quarter
ended December 31, 2013.
iii) You are told that 15 of the units sold on November 24, 2013 were on account. State the journal
entries necessary to record the transactions on November 14 and November 24, assuming the
business uses the: - Periodic inventory system
- Perpetual inventory system.

Question 3

Van Dyke Copier inventory data for the year ended December 31, 2008 is as follow:

Sales Revenue……………………………………………… $50,000

Cost of Goods Sold:
Beginning Inventory………………………….. $ 4,200
Net Purchases…………………………………… 27,400
Cost of Goods Available……………………… 31,600
Ending Inventory……………………………… (4,600) 27,000
Gross Profit………………………………………………… $23,000

a) Assume that ending inventory was accidentally overstated by $1,000. What are the correct
amounts for cost of goods sold and gross profit?
b) How would the inventory error affect cost of goods sold and gross profit for the year ended
December 31, 2009?
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Question 4

Shepard Company sold 2,000 units of its product at $108 per unit in 2008 and incurred operating
expenses of $14 per unit in selling the units. It began the year with 840 units in inventory and made
successive purchases of its product as follows:

January 2 Beginning Inventory………….. 840 units @ $58 per unit

April 2 Purchase ………………………….. 600 units @ $59 per unit
June 14 Purchase ………………………….. 500 units @ $61 per unit
August 29 Purchase ………………………….. 700 units @ $64 per unit
November 18 Purchase ………………………….. 900 units @ $65 per unit
Total 3,540 units

Shepard Company uses a periodic inventory system.

i) Determine the ending inventory and cost of goods sold amounts for the December financial
statement under the FIFO, LIFO and average-cost methods.
ii) Prepare comparative income statements for the three inventory costing methods.
iii) How would the financial results from using the three alternative inventory costing methods
change if Shepard had been experiencing decreasing prices in its purchases of inventory?

Question 5
The ordering of material KL has caused concern in the past according to the chief accountant. There
have been occasions when an excessive amount of stock has been carried beyond any possible demand
and when the problem was addressed and the stock level cut, orders have been unfulfilled and sales lost
because the company has run out of material KL. The chief accountant has said he wants a policy that
achieves the following aims.

 Adequate stock of material KL so as to minimize the risk of shortage and production

dislocation.
 This should be balanced with the avoidance of excessive stock levels of material KL and the
consequent tying up of scarce resources.

You are given the following information:

i) Budgeted average demand for material KL is 400 kilos per week and production is
maintained for 50 weeks in the year.
ii) The ordering cost is $150 per order
iii) The standard material cost of KL is $6 per kilo and carrying costs are 33 ⅓% of that figure
per annum, for each kilo
iv) The maximum usage in any one-week is 600 kilos and the minimum 400 kilos.

On average, the order takes anything from one to three weeks to be delivered after they have been
placed.

Required:
In order to meet the chief accountant’s objectives, determine the following

a) The optimum order quantity that should be placed

b) The reorder level for stock KL
c) The minimum level of stock that should be held
d) The maximum level of stock that should be held.

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