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FA – L1 – Q54 – Inventory

Define inventories and net realisable value under IAS 2 for AfraHealth Ltd.

Question

(A) Under IFRS Accounting Standards, IAS 2 deals with inventories. Define the following terms:

(i) Inventories

(ii) Net realisable value

(A) AfraHealth Ltd. controls its creditors’ accounts by preparing monthly creditors’ ledger control account in two parts, Upper and Lower Regions.
The following figures were available as at January 31st 20X9 when there was a difference of GH¢3,000 on the Trial Balance.

Upper Region	GH¢	Lower Region	GH¢
Credit Balance b/d	15,600	Credit Balance b/d	10,200
Debit Balance b/d	2,500	Debit Balance b/d	284
Purchases	115,200	Purchases	18,500
Returns	8,000	Returns	1,400
Charges	800	Charges	120
Bank	30,500	Bank	15,200
Discount	2,500	Discount	1,520
Balance c/d	1,500	Balance c/d	1,300

On 31st January, 20X9 the officer in charge of Upper Region Ledger declared GH¢89,600 while that of Lower Region declared GH¢15,016.
You are required to:
(i) Prepare creditors ledger control account for the Upper and Lower Regions respectively.
(ii) Draw any conclusion you can from the two control accounts.

Answer

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Tags: Control Accounts, Creditors Ledger, Financial accounting, Reconciliation, Trial Balance
Level: Level 1

Topic: Control accounts and account reconciliations

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

Question

Fuseni Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under:

	Product A	Product B
Sales	GH¢ 200,000,000	GH¢ 150,000,000
Direct material	GH¢ 45,000,000	GH¢ 30,000,000
Direct labour	GH¢ 60,000,000	GH¢ 45,000,000
Factory overheads	GH¢ 35,000,000	GH¢ 15,000,000
Price per unit	GH¢ 20	GH¢ 25

Details of factory overheads are as follows:
(i) Product A is stored in a rented warehouse whose rent is GH¢0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilised. The rent has been budgeted at GH¢0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is GH¢6.0 million and GH¢2.0 million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at GH¢4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.

Answer

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, Overhead allocation, Sales mix, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

Question

Ofori Fabricators produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:

	GH¢
Sales	22,500,000
Less: Variable expenses	13,500,000
Contribution margin	9,000,000
Less: Fixed expenses	6,300,000
Net income	2,700,000

Required:
(a) Compute the break-even point in GH¢ and the margin of safety.

(b) Calculate the contribution margin ratio and the break-even point in units if the variable cost per unit increases by GH¢600? Also calculate the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year.

(c) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of GH¢3,150,000.

Answer

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Tags: break-even analysis, contribution margin, CVP analysis, fixed costs, Margin of safety, variable costs
Level: Level 2

Topic: Cost-volume-profit (CVP) analysis

FA – L1 – Q53 – Control accounts and account reconciliations

Prepare a revised sales ledger control account for Biomed Supplies Ltd for 20X8, correcting identified errors.

Question

The sales ledger control account of BioHealth Solutions Ltd for the year ended 31st December 20X8 has been prepared from the following information:

	GH¢
Debit balance b/d 1st January 20X8	128,540
Credit balance b/d 1st January 20X8	2,800
Total for the year 1st January 20X8 to 31st December 20X8
Credit Sales	1,144,200
Cheques received from customers	1,046,200
Cash received from customers	7,100
Sales returns from customers	12,000
Discounts allowed	2,480
Dishonoured cheques	5,000
Contras purchases ledger	10,640
Irrecoverable debts	6,500

The sales ledger control account balance, which is part of the double entry system, failed to agree with the total receivables of GH¢189,380 as shown by the schedule of receivables. The following errors were subsequently discovered:

(i) A customer had returned goods to BioHealth Solutions Ltd at the selling price of GH¢2,400. The goods had been bought on credit. No entries had been made to record the return of the goods in the accounts of BioHealth Solutions Ltd.
(ii) The discounts allowed column in the cash book had been overcast by GH¢1,080.
(iii) No contra entry had been made in the receivables account in the sales ledger in respect of purchases by BioHealth Solutions Ltd of goods at a list price of GH¢2,000. PC Ltd received a trade discount of 10% on these goods. This transaction had been correctly dealt with in the Sales Ledger Control Account.
(iv) A credit sale of GH¢3,520 to JT Private Health Ltd was correctly recorded in the sales ledger control account, but no other entry had been made.
(v) A cheque received from a customer for GH¢6,900, correctly processed through the books, had subsequently been dishonoured. No entries have yet been made to record this dishonoured cheque.
(vi) DT Medical Ltd, a customer, has recently been declared bankrupt and the debt of GH¢3,500 is to be written off, but no entries have yet been made.

Required:
(a) Prepare a revised sales ledger control account for the year ended 31 December 20X8.

(b) Prepare a statement showing the correct total of the Schedule of Receivables for the year ended 31 December, 20X8.

Answer

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Tags: Advantages, Control Accounts, Errors, Financial accounting, Fraud Prevention, Payables, Receivables
Level: Level 1

Topic: Control accounts and account reconciliations

FA – L1 – Q52 – Control accounts and account reconciliations

Adjust sales/purchase ledger control accounts and reconcile with individual ledger balances for Kofi Enterprises.

Question

Kofi Enterprises maintains accounts on a fully integrated computerised accounting system which produces control accounts as an integral part of the DOUBLE ENTRY system. At the end of each month individual sales and PURCHASE ledger balances are reconciled automatically to the respective control accounts as a pre-programmed control check.

Unfortunately Kofi was taken ill in the middle of August and his assistant input a number of entries without the correct integration codes. Consequently the system has been unable to reconcile the control accounts at the end of that month. The assistant has manually extracted the individual ledger balances, and the net totals at 31 August are as follows.

Purchase ledger	Sales ledger
GH¢3,556	GH¢8,946

The assistant has also manually produced draft accounts for the six months to 31 August and provides you with the following abridged trial balance.

	GH¢	GH¢
Sales ledger control account	8,979
Purchase ledger control account		7,496
Net profit per draft accounts		4,322
Sundry balances (net)	2,839
	11,818	11,818

You have checked through the accounting records and discovered the following discrepancies.
(1) The total for the PURCHASES day book input total for August has been incorrectly shown as GH¢6,241 following a manual override. The total should have been GH¢2,641.
(2) An old debit balance of GH¢28 in the PURCHASE ledger had been written off during August as bad. You discover that no ENTRY had been input other than in the individual supplier’s ledger account.
(3) A payment of GH¢260 on 14 August relating to the payment of a July PURCHASES invoice had been wrongly input in the cash account as wages.
(4) During the month of August there had been a mix-up over goods supplied to a CUSTOMER, Kwame. The goods were invoiced for GH¢62, despatched to Kwame and correctly entered in the system on 5 August. Several items turned out to be defective and were returned by Kwame on 28 August. These goods, originally costing GH¢14, were included in the original invoice of GH¢62 at an amount of GH¢17. No ENTRY was made in the books as a result of the return of the goods but they were manually input into the INVENTORY account at GH¢17. Owing to their damaged state their net realisable value is estimated to be GH¢5.
(5) Kofi has received discounts during the month amounting to GH¢280. However, these have only been manually input to the individual suppliers’ accounts.
(6) Certain discrepancies in the print-out of balances at 31 August have come to light, suggesting a software error might also have occurred. You discover that
(i) debit balances on the sales ledger of GH¢54 and GH¢69 respectively had been completely omitted from the listing
(ii) a CREDIT balance on the PURCHASE ledger of GH¢71 had been listed as a debit balance of GH¢17
(iii) the total of debit entries on Adwoa’s account in the sales ledger had been overcast by GH¢90.

Required
(a) Adjust the sales and PURCHASE ledger control accounts and show the reconciliation of the closing balances with the aggregate of the individual balances extracted from the PURCHASE and sales ledgers.

(b) Compute a revised net profit for the six month period to 31 August.

Answer

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Tags: Bad Debts, Discounts, Error Correction, Financial Statements, Inventory Valuation, Ledger adjustments, Misclassification, Net profit
Level: Level 1

Topic: Correction of Errors

FA – L1 – Q51 – Control accounts and account reconciliations

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

Question

Tobi and Co sells goods on credit to most of its customers. In order to control a debt collection system, the company maintains a trade receivables ledger control account. In preparing the accounts for the year to 30 October 20X9 the accountant discovers that the total of all the personal accounts in the trade receivables’ ledger amounts to GH¢12,802, whereas the control account balance discloses a balance of GH¢12,550.
Upon investigation the following errors were discovered:
(1) Sales for the week ending 27 March 20X9 amounting to GH¢850 had been omitted from the control account.
(2) An account balance of GH¢300 had not been included in the list of balances.
(3) Cash received of GH¢750 had been entered in a personal account as GH¢570.
(4) A customer had qualified for an early settlement discount when not expected to do so. The amount of GH¢100 had not been entered in the control account.
(5) A personal account balance had been undercast by GH¢200.
(6) A contra item of GH¢400 with the trade payables ledger had not been entered in the control account.
(7) An irrecoverable debt of GH¢500 had not been entered in the control account.
(8) Cash received of GH¢250 had been debited to a personal account.
(9) Discounts received of GH¢50 had been debited to a customer’s ledger account.
(10) Returns inwards valued at GH¢200 had not been included in the control account.
(11) Cash received of GH¢80 had been credited to a personal account as GH¢8.
(12) A cheque for GH¢300 received from a customer had been dishonoured by the bank, but no adjustment had been made in the control account.

Required:
(a) Prepare a corrected trade receivables control account, bringing down the amended balance at 31 October 20X9.

(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it reconciles with the amended control account balance.

Answer

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Tags: Control Accounts, Error Correction, Financial accounting, ledger reconciliation, Trade Receivables
Level: Level 1

Topic: Control accounts and account reconciliations

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

Question

Gems Limited (GL) is a manufacturer of consumer durables based in the Upper Region. Opal Limited, one of the major customers, has invited GL to bid for a special order of 150,000 units of Product Beta.

Following information is available for the preparation of the bid:

(i) Each unit of Beta requires 0.5 kilograms (kg) of material “C”. This material is produced internally in batches of 25,000 kg each, at a variable cost of GH₵200 per kg. The setup cost per batch is GH₵80,000. Material “C” could be sold in the market at a price of GH₵225 per kg. GL has the capacity to produce 100,000 kg of material “C”, however, the current demand for material “C” in the market is 75,000 kg.

(ii) Every 100 units of Product Beta requires 150 labour hours. Workers are paid at the rate of GH₵9,000 per month. Idle labour hours are paid at 40% of normal rate and GL currently has 20,000 idle labour hours. The standard working hours per month are fixed at 200 hours.

(iii) The variable overhead application rate is GH₵25 per labour hour. Fixed overheads are estimated at GH₵22 million. It is estimated that the special order would occupy 30% of the total capacity. The production capacity of Beta can be increased up to 50% by incurring additional fixed overheads. The fixed overhead rate applicable to enhanced capacity would be 1.5 times the current rate. The utilised capacity at current level of production is 80%.

(iv) The normal loss is estimated to be 4% of the input quantity and is determined at the time of inspection which is carried out when the unit is 60% complete. Material is added to the process at the beginning while labour and overheads are evenly distributed over the process.

(v) GL has the policy to earn profit at the rate of 20% of the selling price.

Required:

Calculate the unit price that GL could bid for the special order to Opal Limited.

Answer

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Tags: Fixed Overheads, Incremental costs, Labour costs, Material costs, Profit Margin, Relevant costs, Special order
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

FA – L1 – Q50 – Control accounts and account reconciliations

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

Question

The net sales ledger balances of Wako Associates aggregated GH¢319,000 as on December 31, 20X9. However, the receivables control account showed balance of GH¢350,410. On checking the following errors were identified:
(i) A credit balance amounting to GH¢1,200 had been omitted from the list of balances.
(ii) The Sales Return Book had been undercast by GH¢12,000.
(iii) A balance owed by Murad amounting to GH¢2,100 had been written off by debiting irrecoverable debts and crediting allowance for receivables accounts.
(iv) A debit balance of GH¢2,600 in the sales ledger had been listed as a credit balance.
(v) No entry had been made in the control account to record transfer of GH¢3,600 standing to the credit of David’s account in the purchases ledger to his account in the sales ledger.
(vi) Goods returned by Kwame amounting to GH¢1,700 were credited to his account in the sales ledger but debited to purchase account in the general ledger.
(vii) Enoch had been expected to take a settlement discount of GH¢800 and this had been correctly accounted for. However, Enoch did not settle on time and thus did not qualify for the discount.
(viii) A dishonoured bill of exchange from AC & Company for GH¢1,800 was properly entered in sales ledger but was debited to miscellaneous expense account in general ledger.
(ix) GH¢450 received from Thompson & Co., a customer, were correctly posted in the control account but was debited in the customers ledger as GH¢540.
(x) The trial balance included a credit balance of GH¢18,000 in the suspense account. It was revealed that 60% of the amount represents posting errors in the receivables control account.

Required:
(a) The receivables control account showing the necessary adjustments.

(b) A statement reconciling the receivables ledger balance with the corrected balance of the receivables control account.

Answer

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Tags: Account Reconciliation, Adjustments, Double Entry, Error Correction, Financial accounting, Ledger balances, Receivables control account, Sales Ledger, suspense account, Trade Receivables
Level: Level 1

Topic: Control accounts and account reconciliations

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

Question

Akroma Ghana Limited has a machine with which it produces Item A. Ten (10) machine hours are required to produce the item. This product’s selling price is GH₵150 with a variable cost of GH₵60. The company has just received an order for the supply of Item B. Each unit of Item B will require four (4) machine hours. The annual quantity of Item B required is 12,000 units and the cost estimates for the quantity is given below:

	GH₵
Direct material	125,000
Direct wages	52,000
Variable overheads	58,000
Floor space occupancy	11,500
Depreciation	7,500
Salary of Inspector for Item B alone	10,000
Total Cost	264,000

It was noted that Item B could be outsourced from a supplier at a cost of GH₵28 per unit.
You are required to assist management to decide whether to produce Item B internally or to buy from an outside supplier if the following conditions exist:
(i) Production of Item B will not in any way disturb the production of Item A.
(ii) The machine producing Item A is already fully engaged.

(B) List any FIVE steps in the management decision-making process.

Answer

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Tags: contribution margin, Incremental costs, Machine Hours, Make-or-Buy Decision, Opportunity costs, Relevant costs
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

FA – L1 – Q49 – Control accounts and account reconciliations

Prepare receivables and payables control accounts for Sahara Health Ltd for 20X9 using provided financial data.

Question

Sahara Health Ltd has an accounting system where all separate ledger accounts are maintained for each individual customer and supplier.
The management wishes to draft the related control accounts.
The following information is available:

Description	GH₵
Receivables as on December 31, 20X8	32,000,000
Payables as on December 31, 20X8	23,350,000
Cheques issued to suppliers in settlement	14,360,000
Cash sales memos issued	550,000
Goods returned to suppliers	180,000
Cheques received from receivables in settlement	31,650,000
Cheque received from suppliers against return of goods	120,000
Credit sales invoices issued	35,900,000
Returns by customers: from cash sales	320,000
Returns by customers: from credit sales	980,000
Goods purchased on credit	27,700,000
Cash refund to a debtor who had paid the amount due twice	200,000
Cheque issued by a debtor on Dec. 28, 20X8 was dishonoured on May 13, 20X9	500,000
Increase in allowance for receivables (from GH₵1,750,000 to GH₵2,250,000)	500,000
Irrecoverable debts written off	430,000
Contra settlement between payables and receivables accounts	1,660,000
Credit balances included in customers’ accounts as on December 31, 20X9	75,000
A supplier’s invoice received on December 30, 20X9 relating to goods supplied on December 28, 20X9 has not been entered in the books	350,000

Required
Prepare the receivables and payables control accounts from the above information for the year ended December 31, 20X9.

Answer

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Topic: Control accounts and account reconciliations

Program (SQ): PROFESSIONAL PROGRAM

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FA – L1 – Q54 – Inventory

Define inventories and net realisable value under IAS 2 for AfraHealth Ltd.

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

FA – L1 – Q53 – Control accounts and account reconciliations

Prepare a revised sales ledger control account for Biomed Supplies Ltd for 20X8, correcting identified errors.

FA – L1 – Q52 – Control accounts and account reconciliations

Adjust sales/purchase ledger control accounts and reconcile with individual ledger balances for Kofi Enterprises.

FA – L1 – Q51 – Control accounts and account reconciliations

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

FA – L1 – Q50 – Control accounts and account reconciliations

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

MA – L2 – Q36 – Decision Making Techniques

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

FA – L1 – Q49 – Control accounts and account reconciliations

Prepare receivables and payables control accounts for Sahara Health Ltd for 20X9 using provided financial data.

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Define inventories and net realisable value under IAS 2 for AfraHealth Ltd.

You're reporting an error for "FA – L1 – Q54 – Inventory"

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

You're reporting an error for "MA – L2 – Q39 – Cost-volume-profit (CVP) analysis"

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

You're reporting an error for "MA – L2 – Q38- Cost-volume-profit (CVP) analysis"

Prepare a revised sales ledger control account for Biomed Supplies Ltd for 20X8, correcting identified errors.

You're reporting an error for "FA – L1 – Q53 – Control accounts and account reconciliations"

Adjust sales/purchase ledger control accounts and reconcile with individual ledger balances for Kofi Enterprises.

You're reporting an error for "FA – L1 – Q52 – Control accounts and account reconciliations"

Prepare a corrected trade receivables control account for Tobi and Co for the year ended 31 October 20X9, adjusting for identified errors.

You're reporting an error for "FA – L1 – Q51 – Control accounts and account reconciliations"

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

You're reporting an error for "MA – L2 – Q37 – Decision Making Techniques"

Prepare a receivables control account for Wako Associates with adjustments for errors identified in the sales ledger as of 31 December 20X9.

You're reporting an error for "FA – L1 – Q50 – Control accounts and account reconciliations"

Decide whether Akroma Ghana Limited should produce Item B internally or buy from a supplier under two conditions.

You're reporting an error for "MA – L2 – Q36 – Decision Making Techniques"

Prepare receivables and payables control accounts for Sahara Health Ltd for 20X9 using provided financial data.

You're reporting an error for "FA – L1 – Q49 – Control accounts and account reconciliations"

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