- 12 Marks
FR – L2 – Q19 – Inventories
Question
Kintampo Limited produces a single product. On July 31, 20X5, the finished goods inventory consisted of 4,000 units valued at GH₵220 per unit and the inventory of raw materials was worth GH₵540,000. For the month of August 20X5, the books of account show the following:
| Raw material purchases | GH₵1,250,000 |
|---|---|
| Direct labour | GH₵350,000 |
| Selling costs | GH₵150,000 |
| Depreciation on plant and machinery | GH₵100,000 |
| Distribution costs | GH₵120,000 |
| Factory manager’s salary | GH₵80,000 |
| Indirect labour | GH₵60,000 |
| Indirect material consumed | GH₵40,000 |
| Other production overheads | GH₵90,000 |
| Other accounting costs | GH₵200,000 |
| Other administration overheads | GH₵180,000 |
Other information:
(i) 8,000 units of finished goods were produced during August 20X5.
(ii) The value of raw materials on August 31, 20X5 amounted to GH₵600,000.
(iii) There was no work-in-progress at the start of the month. However, on August 31, the value of work-in-progress is approximately GH₵250,000.
(iv) 5,000 units of finished goods were available in inventory as on August 31, 20X5.
Required:
Compute the value of closing inventory of finished goods as on August 31, 20X5 based on weighted average cost method.
Answer
Cost of production
| Raw materials: Opening inventory | GH₵540,000 |
|---|---|
| Purchases | GH₵1,250,000 |
| Closing inventory | (GH₵600,000) |
| Raw Materials consumed | GH₵1,190,000 |
| Direct labour | GH₵350,000 |
| Depreciation cost | GH₵100,000 |
| Factory manager’s salary | GH₵80,000 |
| Indirect labour | GH₵60,000 |
| Indirect material consumed | GH₵40,000 |
| Other production overheads | GH₵90,000 |
| Total production costs | GH₵1,910,000 |
| Less: work-in-progress – closing | (GH₵250,000) |
| Cost of 8,000 units of finished goods produced | GH₵1,660,000 |
Finished goods
| Opening inventory (4,000 units × GH₵220) | GH₵880,000 |
|---|---|
| Production (8,000 units) | GH₵1,660,000 |
| Total | GH₵2,540,000 |
| Closing inventory (5,000 units) | GH₵1,058,333 |
Calculation of weighted average cost per unit:
Total cost = GH₵2,540,000
Total units = 4,000 (opening) + 8,000 (produced) = 12,000 units
Weighted average cost per unit = GH₵2,540,000 ÷ 12,000 = GH₵211.67
Closing inventory valuation:
Closing inventory = 5,000 units × GH₵211.67 = GH₵1,058,333
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