Question Tag: Inventory Valuation

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  • 15 Marks

AAA – Nov 2024 – L3 – Q2a – Audit Risks and Responses for Ecowud Co. LTD

Identifying audit risks in Ecowud Co. LTD and how auditors should respond.

Ecowud Co. LTD (Ecowud) is a sustainable goal-oriented company that develops, manufactures, and sells plywood made from rice husk and plastic waste. The company has a wide customer base, including construction companies and furniture manufacturers across Ghana and West Africa.

You are the Audit Manager of Adomako & Associates and are planning the audit of Ecowud for the year ended 31 December 2023. You and the Audit Engagement Partner attended a planning meeting with Ecowud’s Finance Manager.

You are reviewing the initial meeting notes to develop the audit strategy and plan. The following key matters were captured:

  1. Development Expenditure: Revenue for the year was forecast at GH¢32 million. During the year, Ecowud spent GH¢3.5 million on developing new types of plywood. Some of these are in the early stages of development, while others are nearing completion. The Finance Manager intends to capitalize the entire GH¢3.5 million spent on development since all projects are likely to succeed.

  2. Inventory Valuation: Ecowud uses a standard costing method to value inventory. However, the company has never updated its standard costs since adopting this policy. The company operates multiple warehouses in Ghana and across West Africa, most of which are third-party rented premises.

  3. Accounting Software: A new accounting software was developed internally and implemented in August. The old and new software did not run parallel, as management deemed it burdensome. Two months after implementation, the IT Manager resigned, and a new IT Manager will take over in January 2024.

  4. Long-term Loan and Share Capital: Ecowud restructured its finances, raising GH¢2 million through share issuance and GH¢3.5 million through a long-term loan. The loan has bank-imposed financial conditions, including a minimum total asset level. If breached, the loan becomes immediately repayable.

  5. Revaluation of Land & Buildings: Ecowud follows a revaluation model for land and buildings. The Finance Manager has announced that all land and buildings will be revalued at the year-end.

Required:
Identify FIVE audit risks in relation to Ecowud Co. LTD and for each risk, explain how the auditor should respond.

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  • 10 Marks

FA – Nov 2024 – L1 – Q5a – Inventory Loss and Statement of Profit or Loss

Compute inventory loss due to fire and prepare a statement of profit or loss for a sole trader.

Mawulolo Enterprise is a retail business that prepares its accounts on 31 March each year. The business maintains a standard gross profit margin of 30% on sales.

The following financial information was extracted from its records as at 31 March 2024:

Item GH¢
Inventory at 1 April 2023 254,000
Operating Expenses 378,000
Finance Cost 58,000
Purchases 1,306,000
Sales 1,900,000
Inventory in good standing at 31 March 2024 192,000

On 31 March 2024, a fire outbreak in the warehouse destroyed some of the inventory records and goods.

The tax charge for the year is estimated at GH¢30,000.

Required:

i)Calculate the amount of inventory lost.

ii) Prepare the Statement of Profit or Loss for the year ended 31 March 2024

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  • 20 Marks

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

Maideline Nigeria Limited manufactures tyres for use by cars, trucks, and trailers. The company is owner-managed, meaning the shareholders are also the directors. On June 1, 2020, the directors decided to wind up the company due to the high cost of operations, the Naira’s depreciation against the US dollar, and the economic impact of COVID-19, which have severely impacted the company’s ability to continue business.

Management notified employees, suppliers, and customers that Maideline would cease all manufacturing activities by September 30. Consequently, all factory workers and most employees in accounts and administration were terminated effective September 30. Remaining employees will face redundancy by November 30. A minimal head office team, including the Company Secretary and some support staff, will remain operational for a few more years until the company winds down completely.

Maideline operated 20 branches and a head office. Of these, 12 branches are located in company-owned buildings, while the remaining 8 operate from leased buildings with lease terms of three to five years. Lease agreements prohibit sub-letting and sale. On adopting IFRS 16, the entity assumed lease renewals at term end, recording lease liabilities and right-of-use assets. A small head office building will remain in use until its lease expires in three years. Maideline accounts for its tangible non-current assets at cost, less depreciation, and has recognized deferred tax assets due to past tax losses and unutilized capital allowances.

All products sold carry a one-year warranty. Until May 31, 2020, the company offered two- and three-year extended warranties, but these were discontinued from March 1, 2020. Maideline distributes products nationally and internationally under three-year agreements and maintains annual supplier contracts. While no distributors or suppliers have pursued legal actions, some are withholding payments, awaiting penalty settlements they claim are due.

Required:
Using the information provided, identify and explain the financial statement risks to be taken into account in planning the final audit of Maideline in respect of the year ended December 31, 2020. (20 Marks)

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discusses control activities for Reliable Ltd and external auditor responsibilities in light of control gaps and bank requirements.

Reliable Limited is into wholesale and retail supply and distribution of stationeries to companies and educational institutions. The company maintains business relationships with other enterprises that are owned by close friends and relatives. The books of account of the company were kept manually and in simple Excel. The company had only a staff member in the accounts department since it is a small business operation.

A review of the company’s operations shows that inventory of stationeries purchased was not properly valued due to incomplete recording of purchases made. Although bank statements are obtained, the balances on the bank statements were not reconciled with the cash book.

Cash from sales made was not banked intact, and expenses relating to cash takings from the till were not all recorded or properly monitored. Added to this, goods bought from related parties were sometimes overvalued as suppliers made frivolous claims which could not be disputed due to poor record keeping. The Managing Director and owner of the company has been sick for some time, and the wife concentrated more on her own business, leaving the operations of the company to a relation who is not well educated. Available evidence revealed that invoices and vouchers of the company were approved without management review, and the procedure or selection of suppliers was not transparent.

The company has just won a contract for the supply of stationeries in one of the states in the Federation, and it was found that there was inadequate cash flow to execute the contract. The manager of the company informed the Managing Director’s wife of the development, and it was agreed that a bank loan would be needed. On approaching the bank, updated financial statements of the company were requested to determine the financial health of the business and ability to repay the loan when due.

Your firm has been appointed as auditors of the company with a stipulated deadline to complete the audit so that the company could meet the bank’s conditions. The firm has conducted a preliminary review of the operations of the company, and some control gaps have been noted.

Required:

a. Discuss suitable control activities that will be required in the above scenario and how you will assess the degree of effectiveness of the internal control systems.
(10 Marks)

b. Identify and explain what the external auditors are expected to do during the course of the above audit.
(5 Marks)

Total: 15 Marks

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  • 10 Marks

PSAF – May 2021 – L2 – Q5a – Public Sector Financial Statements

Identification of inventory costs excluded under IPSAS 12 and disclosure requirements for financial statements.

IPSAS 12 on Inventories deals with the valuation and presentation of inventories in the financial statements in the context of the historical cost system, the most widely adopted basis on which financial statements are presented.

Required:

In accordance with IPSAS 12, identify FOUR costs that are excluded from the cost of inventories and FOUR requirements to be disclosed in the financial statements.

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  • 30 Marks

FR – Nov 2014 – L2 – Q1 – Presentation of Financial Statements (IAS 1)

Analyze a trial balance to prepare financial statements, compute impairment, and adjust inventories for a corporate entity.

The Trial Balance of Excellent Plc. as at 30 June 2014 is as follows:

 

The following notes are relevant:
i. Inventories as at 30/6/2013:

The net realisable values of these commodities per unit are as follows:

ii. Inventories on 30 June 2014 amounted to N9,000,000

iii. Prepaid salaries and wages were N10,000,000

iv. Included in the plant and machinery maintenance cost was depreciation of
N14,800,000.

v. The allowances for receivables are no longer required. The outstanding 10%
loan notes interest was paid on 30 June 2014 and this has not been accounted
for. The fair value of goods is N40,000,000 at the end of the year.

vi. The value in use of delivery van for the year 30 June 2014 is N31,000,000. The
prevailing market interest rate is 21% per annum and the Discounting Factor for
this year is 0.8264.

vii. The fair value of delivery van at an arm’s length transaction as at 30 June 2014
was N28,000,000 and the cost to sell was N2,000,000. All non-current assets
were depreciated at 10% per annum on reducing balance basis.

viii. Current tax provision for the year is N165,000,000.

Required:

a. Identify any FOUR of the cost items that are EXCLUDED in the valuation of inventories under IAS 2. (4 Marks)

b. Calculate the following:

  • (i) Value of opening inventories to be included in the Statement of Profit or Loss and Other Comprehensive Income. (2 Marks)
  • (ii) The present value in the use of delivery van (1 Mark)
  • (iii) The fair value and recoverable amount of delivery van (2 Marks)
  • (iv) The carrying amount and impairment if any on delivery van (2 Marks)

c. Prepare the Statement of Profit or Loss and Other Comprehensive Income (OCI) and Statement of Changes in Equity for the year ended 30 June 2014. (11 Marks)

d. Prepare the Statement of Financial Position as at 30 June 2014. (8 Marks)

Show all relevant workings

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  • 30 Marks

PM – Nov 2016 – L2 – Q1 – Decision Making Techniques

Evaluate profit maximization, machine bottlenecks, and inventory valuation using marginal and throughput accounting approaches.

Hicenta Limited makes three products Soyi, Milco and Yoghurt. All the three
products must be offered for sale each month in order to provide a complete
market service. The products are fragile and their quality deteriorates rapidly
shortly after production.
The products are produced on two types of machine and worked on by a single
grade of direct labour. Fifty direct employees are paid N80 per hour for a
guaranteed minimum of 160 hours per month.
All the products are first pasteurised on a machine type A and then finished
and sealed on a machine type B.
The machine hour requirements for each of the products are as follows:

Machine Information:

Machine Type Product Hours per Unit
Machine A Soyi 1.5
Machine A Milco 4.5
Machine A Yoghurt 3.0
Machine B Soyi 1.0
Machine B Milco 2.5
Machine B Yoghurt 2.0

The capacity of the available machines type A and B are 6,000 hours and 5,000
hours per month respectively. Details of the selling prices, unit costs and
monthly demand for the three products are as follows:

Product Costs and Demand:

Product Selling Price (N per unit) Concentrate Cost (N per unit) Other Direct Material Cost (N per unit) Direct Labour Cost (N per unit) Overheads (N per unit) Profit (N per unit) Maximum Monthly Demand (units)
Soyi 910 220 230 60 240 160 1,200
Milco 1,740 190 110 480 620 340 700
Yoghurt 1,400 160 140 360 520 220 600

Although, Hicenta Limited uses marginal costing and contribution analysis as
the basis for its decision making activities, profits are reported in the monthly
management accounts using the absorption costing basis. Finished goods
inventories are valued in the monthly management accounts at full absorption
cost.
You are required to:

a. Calculate the monthly machine utilisation rate for each product and
explain which of the machines is the bottleneck/limiting factor.
(6 Marks)
b. Use current system of marginal costing and contribution analysis to
calculate the profit maximising monthly output of the three products.
(6 Marks)
c. Explain why throughput accounting might provide more relevant
information in Hicenta‟s circumstances. (6 Marks)
d. Use a throughput approach to calculate the throughput-maximising
monthly output of the three products. (6 Marks)
e. Explain the throughput accounting approach to optimizing the level of
inventory and its valuation. Contrast this approach to the current system
employed by Hicenta. (6 Marks)

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  • 1 Marks

FA – May 2012 – L1 – SA – Q13 – Accounting for Inventories (IAS 2)

Identifying the best method for inventory valuation according to IAS 2.

According to International Accounting Standard No 2 on “Inventories”, which of the following methods can best be employed for the calculation and valuation of inventories?

A. Last purchase price
B. Last-In-First-Out
C. Base stock
D. Average cost
E. Replacement cost

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  • 1 Marks

FA – May 2012 – L1 – SA – Q10 – Elements of Financial Statements

Identifying which element is not affected when the proprietor consumes goods.

The value of goods taken by the proprietor of a firm for his consumption will affect all but ONE of the following:

A. Gross profit
B. Net profit
C. Inventory balance
D. Company’s capital
E. Inventory valuation.

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  • 1 Marks

FA – Nov 2011 – L1 – SA – Q6 – Accounting for Inventories (IAS 2)

This question asks about the basis for valuing stock in a trading company.

What is the basis of valuing stock in a trading company?

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  • 20 Marks

FR – April 2022 – L2 – Q3 – Preparation of Financial Statements and Adjustments

Prepare the statement of comprehensive income and statement of financial position for Caput Plc for the year ended 31 December 2020, incorporating necessary adjustments.

The trial balance of Caput Plc, as at 31 December, 2020 is provided below:


Additional Information:
1. An inventory count at 31 December 2020 amounted to GH¢15,750,000. This includes damaged goods with a cost of GH¢1,200,000. These will require remedial work costing GH¢675,000 and could be sold for GH¢1,425,000.
2. Finance cost is made up of the full year’s preference and ordinary dividends paid.
3. Non-Current Assets:

  • Land and Building were revalued at GH¢22,500,000 and GH¢72,000,000 respectively on 1 January 2020, resulting in revaluation gain of GH¢11,000,000 for the current year. At that date, the remaining life of the building was 15 years. Depreciation is on a s

    • traight-line basis. Ignore deferred tax implications.

  • Depreciation on Plant and Equipment is at 12.5% on a reducing balance basis.
  • Investment Property: On 31 December 2020, a qualified surveyor valued the property at GH¢20,250,000. Caput Plc uses the fair value model under IAS 40: Investment Property to value its investment property.
  • It is the policy of the company to charge depreciation on a full-year basis

    • .

4. The directors have estimated the provision for income tax for the year ended 31 December 2020 at GH¢12,000,000. The deferred tax for the year ended 31 December 2020 is to be adjusted so that the tax base of the company’s net assets is GH¢18,000,000 less than the carrying amount. Assume the rate of tax is 30%.
5. On 1 October 2020, Caput Plc imported a piece of equipment from a European supplier for €1 million and agreed to settle the bill in six months’ time. The relevant exchange rates are provided below:

No entries have been made for the above transaction. Any exchange difference on translation should be debited or credited to operating expenses.
Required:
Prepare for Caput Plc:
a) Statement of Comprehensive Income for the year ended 31 December 2020. (10 marks)
b) Statement of Financial Position as at 31 December 2020. (10 marks)

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  • 1 Marks

MI – May 2016 – L1 – SA – Q6 – Costing Techniques

Calculate the net profit using marginal costing based on given absorption costing profit and inventory data.

The net profit was N2,650,000 using absorption costing and the closing inventory was 14,600 units. Production overhead absorption rate was N18.50 per unit. If the Non-production absorption rate was N14.00 per unit, then the net profit using marginal costing is:
A. N2,379,900
B. N2,445,600
C. N2,650,000
D. N2,854,400
E. N2,920,100

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  • 5 Marks

FA – May 2024 – L1 – SB – Q5b – Accounting for Inventories (IAS 2)

Calculates the total lower of cost and NRV adjustment required for Bala PLC’s inventory and prepares the necessary journal entry.

b. Bala PLC prepares its financial statements on December 31, 2023. At the end of the year, Bala PLC holds three different inventory items. The following information is available for each item:

  • Item A:
    Cost as at December 31, 2023: ₦1,500,000
    Estimated selling price: ₦1,800,000
    Estimated costs of completion, disposal, and selling expenses: ₦200,000
  • Item B:
    Cost as at December 31, 2023: ₦2,250,000
    Estimated selling price: ₦2,000,000
    Estimated costs of completion, disposal, and selling expenses: ₦300,000
  • Item C:
    Cost as at December 31, 2023: ₦3,000,000
    Estimated selling price: ₦3,200,000
    Estimated costs of completion, disposal, and selling expenses: ₦400,000

Required:

i. Calculate the total lower of cost and NRV adjustment required for inventory of Bala PLC. (2 Marks)

ii. Prepare the necessary journal entry to adjust the inventory to its lower of cost and NRV. (3 Marks)

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  • 6 Marks

FA – May 2024 – L1 – SB – Q5a -Accounting for Inventories (IAS 2)

Explains the essential components involved in measuring inventories under IAS 2.

a. Explain the essential components involved in measuring inventories in compliance with IAS 2 – Inventories. (6 Marks)

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  • 20 Marks

AA – Nov 2015 – L2 – Q5 – Completion Procedures and Reporting, Audit and Assurance Evidence

Discussing financial statement amendments for inventory valuation, depreciation, and contingent liabilities, and their impact on the auditor’s report.

Big Build is a listed construction company with an annual revenue of GHS350m. Big Build’s draft statement of profit or loss shows a profit before tax for the year ended December 31, 2008, of GHS40m.

Big Build’s audit firm is conducting an audit. This is the first audit of Big Build that this audit firm has conducted. An enquiry to the previous audit firm revealed no reasons for concern. On completing audit work at the company’s premises, the audit senior drafts a memo, extracts from which are reproduced below:

(a) Inventory valuation:
Inventories include GHS7m, at cost, for scrap rubber from used car tyres. This material is widely used as a road surface in other countries. Contracts for road building with this country’s Highways Agency, the state authority for road construction, do not currently permit the use of this material. However, the matter was known to be under review, and Big Build speculated on a favourable outcome of this review and purchased the material. In February 2009, shortly before the financial statements were approved by the directors, the Highways Agency reported that it would not, currently, accept the use of this material. If used on non-Highways Agency contracts, the material’s net realisable value would not exceed GHS2m.

The finance director maintains that the issue of the Highways Agency report was a non-adjusting event after the reporting period. The write-down of the inventory should, therefore, be reflected in the next period’s financial statements.

(b) Depreciation:
During the year ended December 31, 2005, the company purchased two computer-controlled earth movers at a cost of GHS2,500,000 each and a further two at the same price during the year ended December 31, 2006. Depreciation has been provided at 10% straight line, the same basis as it previously depreciated conventional earth movers. This year, 2008, the company has decided that improvements in technology made it worthwhile scrapping their first two computer-controlled earth movers and replacing them with the latest model at a cost of GHS6,000,000 each. The company provides a full year’s depreciation charge in the year of acquisition and none in the year of disposal.

The company’s chief engineer tells you that technology is developing so rapidly it appears likely they will continue to replace these machines every five years. In spite of this, the finance director claims that the depreciation rate of 10% is in line with the industry standard and reflects the physical life of the machines. He urges that continued improvements in technology cannot be foreseen, and that there is no justification for increasing depreciation to 20% because of the possibility of technological obsolescence.

(c) Contingent liability:
The company is being sued for GHS50m by the Highways Agency for defective work on a recently completed road. The company maintains that it met the Highways Agency’s specification and it is the Agency’s engineers who are at fault in drawing up the specification. Big Build maintains that it has no case to answer, that the possibility of loss is remote, and that the claim need not be disclosed as a contingent liability. An investigative journalist has recently published an article suggesting that other roads constructed by the company exhibit similar faults. The managing director has admitted that the company’s road building techniques are under investigation by the Highways Agency. If the company were to lose the case, its future going concern would be threatened. No disclosure has been made in the financial statements.

Required:
For each of the following three issues, discuss whether the financial statements require amendment and describe the impact on the auditor’s report if the issue remains unresolved.
a) Inventory valuation.
(6 marks)
b) Depreciation.
(7 marks)
c) Contingent liability.
(7 marks)

Total: 20 marks

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  • 15 Marks

AA – May 2019 – L2 – Q4 – Audit and Assurance Evidence

Defines analytical procedures and outlines substantive procedures for revenue, profit, inventory, payables, and bank loan verification.

You are the external auditor of Paa Willy Ltd (PW) for the year ended 31 March 2019. PW operates 12 convenience stores in the Greater Accra region:

  • Each store sells food.
  • Each store is responsible for its own inventory procurement and produces monthly management accounts which are sent to the centralised accounting department at PW head office.

PW is financed by a GH¢250,000 bank loan which is repayable at a rate of GH¢50,000 per annum over each of the next 5 years starting on 31 October 2019. It also has an overdraft facility of GH¢100,000, which it uses in full. The bank overdraft facility is due for renewal on 1 May 2020.

The bank has already told the company that it will need a cash flow forecast for two years from 1 February 2020 in order for the bank to decide whether or not the overdraft facility will be renewed. The bank has also said it will require a report from the external auditors to confirm the accuracy of the forecast.

Required:
a) Define the term analytical procedures.
(2 marks)

b) In relation to the work of an external auditor:
i) Describe THREE (3) analytical procedures that should be performed to confirm PW’s revenue and profit.
(3 marks)
ii) Outline THREE (3) substantive procedures that should be adopted to verify each of the following assertions:

  • The valuation of inventory.
    (3 marks)
  • The completeness of payables.
    (3 marks)

c) Recommend FOUR (4) appropriate substantive procedures that should be performed to confirm PW’s bank loan.
(4 marks)

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  • 10 Marks

AA – Mar 2024 – L2 – Q3a – Audit and Assurance Evidence

Explain audit procedures to obtain sufficient and appropriate audit evidence for Galito Ltd's inventories.

Galito Ltd is a Ghanaian company that operates in multiple industries and has several subsidiaries. Due to the complexity of its operations, its inventories and properties are scattered across the country and used by any of its subsidiaries.

Required:
As the auditor of Galito Ltd, explain FIVE (5) audit procedures to help obtain sufficient and appropriate audit evidence for its inventories.

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  • 6 Marks

FR – Nov 2018 – L2 – Q2c- Financial Reporting Standards and Their Applications

This question requires calculating the adjustments to opening retained earnings and profit or loss due to changes in accounting policies and estimates.

Talensi, a company reporting under IFRS, is considering making the following changes to its financial statements for the year ended 31 December 2017. Talensi presents one year of comparative information.

  1. Changing the method of depreciation of its plant from straight-line depreciation over five years (with a nil residual value) to reducing balance at 20% per annum with effect from 1 January 2017. The plant originally cost GH¢100 million on 1 January 2015.
  2. Changing the basis of valuation of certain non-seasonal inventories from first-in, first-out (FIFO) to weighted average cost (WAC). Inventories were valued as follows under the two different methods:
    31 December 2015 31 December 2016 31 December 2017
    FIFO: GH¢64 million FIFO: GH¢66 million FIFO: GH¢71 million
    WAC: GH¢62 million WAC: GH¢63 million WAC: GH¢67 million
  3. Changing the revenue recognition basis for certain seasonal goods that were first sold in 2015 such that revenue is recognised on delivery to the customer rather than on shipment. This has arisen as a result of a change in delivery arrangements such that, with effect from 1 January 2017, risks are now borne by Talensi until delivery has been made to the customer.
    2015 2016 2017
    Revenue based on shipment date: GH¢50 million GH¢86 million GH¢90 million
    Revenue based on delivery date: GH¢46 million GH¢84 million GH¢88 million

The cost of the seasonal goods is consistently 80% of sales price.

Profit (calculated using existing policies and accounting estimates) was GH¢240 million for the year ended 31 December 2017.

Required:
Calculate the adjustment to opening retained earnings in the statement of changes in equity (including 2016 comparative figures) in the financial statements for the year ended 31 December 2017 and profit or loss for the year ended 31 December 2017.

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  • 20 Marks

FR – May 2019 – L2 – Q3 – Preparation of Financial Statements

Preparation of Statement of Profit or Loss and Statement of Financial Position for Frafraha Ltd as at 31 March 2018.

The following trial balance was extracted from the books of Frafraha Ltd (Frafraha) on 31 March 2018:

The following notes may be relevant:

  1. Frafraha applies the revaluation model of IAS 16 Property, Plant & Equipment to its land and buildings. A revaluation took place on 31 March 2017 and resulted in the fair value of GH¢62 million shown above. This figure included GH¢22 million in respect of land. The buildings were deemed to have a 40-year useful economic life remaining at that date. No depreciation has yet been charged for the accounting period ended on 31 March 2018. All depreciation is charged to cost of sales. On 31 March 2018, a further revaluation took place, which revealed a fair value of GH¢24 million for the land and GH¢41 million for the buildings. This is to be recorded in the books in accordance with the accounting policy of Frafraha.
  2. Plant & equipment is being depreciated at 25% per annum straight line from the date of purchase to the date of sale. On 1 October 2017, a piece of plant was purchased at a cost of GH¢12 million. This replaced another piece of plant which had cost GH¢8 million some years ago and was fully depreciated prior to 31 March 2017. A trade-in allowance of GH¢1 million was received for the old plant. The only entries made to record this transaction were to credit cash and debit suspense with the net payment of GH¢11 million. No other item of plant was more than three years old at 1 April 2017.
  3. The inventories figure in the trial balance is the opening inventories balance measured on the first-in, first-out (FIFO) basis. Due to a change in Frafraha’s business, the company decided to change its accounting policy with respect to inventories to a weighted average basis, as follows:
Date FIFO (GH¢’000) Weighted Average (GH¢’000)
31 March 2016 33,200 30,300
31 March 2017 37,300 34,100

Closing inventories at 31 March 2018, measured under the weighted average basis, amounted to GH¢41.2 million.

  1. Intangible assets consist of capitalised development costs of GH¢30 million. These relate to products in development at 1 April 2017. No revenue has yet been earned from any of these products. They are all expected to be successful once ready for market, with the exception of one project. The amount previously capitalised in respect of this project was GH¢6 million. However, adverse developments have led to the decision to abandon the project as it was unlikely to be successful in the marketplace. During the year, further expenditure was incurred on other qualifying projects and was charged to administration expenses. The amounts are as follows:
    • Prototype development costs GH¢3 million.
    • Marketing research to determine the optimal selling strategy GH¢1 million.
    • Basic research which may lead to future projects GH¢4 million.
  2. Frafraha commenced construction of a new warehouse on 1 May 2017. The building was completed and available for use on 30 November 2017. The cost of construction amounted to GH¢9 million, funded out of general borrowings, which comprise two bank loans as follows:
    • GH¢4 million of bank loan finance at 6% interest.
    • GH¢6 million of bank loan finance at 4.5% interest.

    All interest costs have been expensed in the year to 31 March 2018, but no other entries have been passed in respect of this. Ignore any depreciation in relation to the new warehouse.

  3. Corporate tax for the year is estimated at GH¢0.25 million.

Required:

Prepare, in a form suitable for publication to the shareholders of Frafraha Ltd, the Statement of Profit or Loss for the year ended 31 March 2018 and Statement of Financial Position as at 31 March 2018.

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  • 15 Marks

MA – May 2017 – L2 – Q3a – Standard costing and variance analysis

Calculate the budgeted fixed production overhead costs and prepare profit statements using marginal and absorption costing.

Bosco Ltd makes and sells one product. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows:

Item Cost (GH¢)
Direct labour (3 hours at GH¢6 per hour) 18
Direct materials (4 kilograms at GH¢7 per kilo) 28
Production Overhead (Fixed cost) 20
Total Cost per Unit 66

Normal output volume is 16,000 units per year, and this volume is used to establish the fixed overhead absorption rate for each year. Costs relating to sales, distribution, and administration are:

  • Variable: 20% of sales value
  • Fixed: GH¢180,000 per year

There were no units of finished goods inventory on 1st October 2015. The fixed overhead expenditure is spread evenly throughout the year. The selling price per unit is GH¢140. For the two six-monthly periods detailed below, the number of units to be produced and sold are budgeted as follows:

Period Production (units) Sales (units)
Six months ending 31st March 2016 8,500 7,000
Six months ending 30th September 2016 7,000 8,000

The entity is considering whether to abandon absorption costing and use marginal costing instead for profit reporting and inventory valuation.

Required:

i) Calculate the budgeted fixed production overhead costs for each of the six-monthly periods. (3 marks)

ii) Prepare profit statements for management using:

  • Marginal costing
  • Absorption costing

(9 marks)

iii) Prepare an explanatory statement reconciling the profits under marginal costing with those of absorption costing.

(3 marks)

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