The Institute of Chartered Accountants of Bangladesh

Certificate Level – Management Information

Calculating unit costs (Part -01)

Calculation of Unit cost

Direct Cost Indirect Cost

Direct Material Cost Direct Labour Cost Direct Expenses

FIFO LIFO Weighted averages

Cumulative weighted average Periodic weighted average

Direct costs
Direct costs are costs which can be directly identified with a specific cost unit or cost centre.
There are three main types of direct cost:
 Direct materials: for example, cloth for making shirts.
 Direct labour: for example, the wages of the workers stitching the cloth to make the
shirts.
 Direct expenses: for example, the cost of maintaining the sewing machine used to
make the shirts.  The cost of special designs, drawings or layouts for a particular
job.

The total of direct costs is known as the prime cost.

Indirect Cost
Indirect costs are costs which cannot be directly identified with a specific cost unit or cost
centre. Examples of indirect costs include the following:
 Indirect materials these include materials that cannot be traced to an individual shirt,
for example, cotton
 Indirect labour for example, the cost of a supervisor who supervises the shirt makers
 Indirect expenses for example, the cost of renting the factory where the shirts are
manufactured.

The total of indirect costs is known as overheads.

Direct costs are not necessarily In automated service indirect cost is greater than the
bigger in size than indirect costs. direct material and direct labour cost.
Indirect costs are not less The garage repair job, the rent of the garage is an
important than direct costs. indirect cost, but the rental cost represents a share of
the use of the garage space, without which the job

1 Md. Arshadul kabir, FCA

 could not have been done.
It is easy to confuse fixed and Direct cost- Variable vs Fixed cost; Indirect cost-
variable costs with indirect and Variable vs Fixed Cost. (Salary, wages)
direct costs.
Inventory valuation
When inventory is received into stores from different suppliers and at different prices every
week, it is important that it is valued in a consistent way so that closing inventory values
and issues from stores can be valued accurately.
Valuing inventory in financial accounts
Inventories will be valued at cost in the stores records throughout the course of an
accounting period. Only when the period ends will the value of inventory in hand be
reconsidered so that items with a net realizable value below their original cost will be
revalued downwards, and the inventory records altered accordingly
Pricing of material Issues or inventory valuation methods are stated below:
1) Cost price method: -
a) Specific price method
b) First in First Out method (FIFO)
c) Last in First Out method (LIFO)
d) Base stock method - it is assumed that a minimum quantity of inventory (or base
stock) must be held at all times to carry on business. Up to this quantity the
inventory is valued at the cost at which it was acquired. Any excess over this base
stock may be valued under FIFO or LIFO method. This method is ideal for
processing industries like refineries, tanneries, etc

2) Average price method:

a) Simple average price method = Total unit price
Total No. of purchases
b) Weighted average price method = Total cost
Total No. of units
c) Cumulative weighted average price method

d) Periodic weighted average price method = Cost of opening inventories + Total cost of receipts
in the period
Units of opening inventory + Total units receipt in the
period
3) Market price method:
a) Replacement price method = Issues are valued as if it was purchased now at current market
price
b) Realizable price method = Issues are valued at price if it is sold now

4) Notional price method:

a) Standard price method = Materials are priced at pre-determined rate (or) Standard rate
b) Inflated price method = the issue price is inflated to cover the losses incurred due to
natural (or) climatic losses.
5) Re use price method:
When materials are returned (or) rejected it is valued at different price. There is no final
procedure for this method.

FIFO (first in, first out): Items are used in the order in which they are received from
suppliers, so oldest items are issued first. Inventory remaining is therefore the newer items.

2 Md. Arshadul kabir, FCA

LIFO (last in, first out): Items issued originally formed part of the most recent delivery,
while oldest consignments remain in the bin. This is disallowed under BASs.

AVCO (average cost): As purchase prices can change with each new consignment
received, the average value of an item is constantly changing. Each item at any moment is
assumed to have been purchased at the average price of all the items together, so inventory
remaining is therefore valued at the most recent average price.
Standard cost: All inventory items are valued at a pre-determined cost. If this standard
cost differs from prices actually paid during the period the difference is written off as a
'variance' in the income statement.

Replacement cost: The cost of an inventory unit is assumed to be the amount it would
cost now to replace it. This is often (but not necessarily) the unit cost of inventories
purchased in the next consignment following the balance sheet date.

FIFO Method

FIFO
method

Unit price of material

issued first
Recorded at unit price of
material issued first

Advantages and disadvantages of FIFO method:

Advantages Disadvantages
It is a logical pricing method, which FIFO can be cumbersome to operate
probably represents what is physically because of the need to identify each
happening. batch of material separately.
It is easy to understand and explain to Managers may find it difficult to compare
managers. costs and make decisions when they are
charged with varying prices for the same
materials.
The inventory valuation can be near to a In a period of high inflation, inventory
valuation based on replacement cost. issue prices will lag behind current market
value.

LIFO
Advantages and disadvantages of LIFO method:

Advantages Disadvantages
Inventories are issued at a price which The method can be cumbersome to operate
is close to current market value. because it sometimes results in several batches
being only part-used in the inventory records
before another batch is received.
Managers are continually aware of LIFO is often the opposite of what is physically
recent costs when making decisions, happening and can therefore be difficult to
because the costs are being charged to explain to managers.

3 Md. Arshadul kabir, FCA

their department or products will be
current costs.

Weighted Average Pricing

 Cumulative Weighted Average Pricing

The average price is determined by dividing the total cost by the total number of units. A
new weighted average price is calculated whenever a new delivery of materials is
received into store. This is the key feature of cumulative weighted average pricing. The
issue prices are calculated each time materials are received in stores and not when they are
issued.

Advantages and disadvantages of cumulative weighted average pricing

Advantages Disadvantages
Fluctuations in prices are smoothed The resulting issue price is rarely an actual price
out, making it easier to use the data for that has been paid, and can run to several
decision making. decimal places.
It is easier to administer than FIFO and Prices tend to lag a little behind current market
LIFO, because there is no need to values when there is gradual inflation.
identify each batch separately.

 Periodic Weighted Average Pricing:

The average method differs from the cumulative weighted average method. Instead of
calculating a new inventory value per unit whenever a receipt occurs, a single average is
calculated at the end of the period based on all purchases for the period.

Calculation of average cost per unit = Cost of opening inventories + Total cost of receipts in the
period Units of opening inventory +
Total units receipt in the period
Q # 01

Morton Company uses the periodic inventory method and had the following inventory
information available:
Units Unit Cost (Tk.)Total Cost(Tk.)
1/1 Beginning Inventory 100 4 400
1/20 Purchase 400 5 2,000
7/25 Purchase 200 7 1,400
10/20 Purchase 300 8 2,400
1,000 Tk. 6,200

A physical count of inventory on December 31 revealed that there were 400 units on hand.

Requirement:
Answer the following independent questions and show computations supporting your
answers.
1. Value of closing Inventory under FIFO method

4 Md. Arshadul kabir, FCA

 a. Tk. 400
b. Tk. 2000
c. Tk. 6200
d. Tk. 3100 (300 x 8 + 7 x 100)
2. Value of closing Inventory under Average-Cost method
a. Tk. 6200
b. Tk. 3100
c. Tk. 2480 (6200/1000 x 400)
d. Tk. 2000

3. Value of closing Inventory under LIFO method

a. Tk. 2480
b. Tk. 3100
c. Tk. 6200
d. Tk. 1900 (100 x 4 + 300 x 5)
4. Determine the difference in the amount of income that the company would have
reported if it had used the FIFO method instead of the LIFO method. Would income
have been greater or less?

Solution:
Req. 1:
300 units @ Tk. 8 = Tk. 2,400
100 units @ Tk. 7 = Tk. 700
400 units Tk. 3,100
Req. 2:
Tk. 6,200 ÷ 1,000 = Tk. 6.20 per unit × 400 units = Tk. 2,480

Req. 3:

100 units @ Tk. 4 = Tk. 400

300 units @ Tk. 5 = Tk. 1,500
400 units Tk. 1,900
Req. 4:

Income would have been Tk. 1,200 (Tk. 4,300 – Tk. 3,100) greater if the company used FIFO
instead of LIFO

Cost of Goods Sold

Under FIFO method Cost of goods sold Tk. 3,100 : Under LIFO method Cost of goods sold Tk. 4,300 :
100 units @Tk. 4 = Tk. 400 300 units @ Tk. 8 = Tk. 2,400
400 units @ Tk. 5 = Tk. 2,000 200 units @ Tk. 7 = Tk. 1,400
100 units @ Tk. 7 = Tk. 700 100 units @ Tk. 5 = Tk. 500
600 units Tk. 3,100 600 units Tk. 4,300

Batch questions analysis

Nov-Dec 2017, Q # 7

5 Md. Arshadul kabir, FCA

Zakaria Company, sold 12,000 cases of Product Q for Tk. 120,000 during the second quarter of the year. Facts
related to its beginning inventory and purchases are as follows:

April. 1 Beginning inventory 5,000 cases @ Tk.4.00

April 10 Purchases 3,000 cases @ Tk.5.00
May 13 Purchases 8,000 cases @ Tk.4.50
June 5 Purchases 2,000 cases @ Tk.5.00
For the quarter ended June 30, compute the ending inventory, cost of goods sold and gross margin under two
methods: (a) average-cost, and (b) FIFO
Availabe inventory = 18,000
Sold = 12,000
CI = 6,000

FIFO
Value of CI under fifo method = 2,000 x 5 + 4,000 x 4.50 =Tk. 28,000
COG = 5,000 x 4+ 3,000 x 5+ 4,000 x 4.50 = Tk. 53,000
Gross Margin = Sales – COGS
= Tk. 120,000 – Tk. 53,000 = Tk. 67,000

LIFO
CI = 5,000 x 4 + 1,000 x 5 = Tk. 25,000
COG = 2,000 x 5 + 8,000 x 4.50 + 2,000 x 5 =Tk. 56,000
Gross margin = Sales – COGS = Tk. 120,000 – Tk. 56,000 = Tk. 64,000

Average Cost Method

Average cost Method = Total Purchase Price/Total Unit = Tk. 81,000/18,000 = Tk. 4.50
Value of CI = 6,000 x 4.50 = Tk. 27,000
COGS = 12,000 x 4.50 = Tk. 54,000
Gross Margin = Sales – COGS = Tk. 120,000 – Tk. 54,000 = Tk. 66,000

CI PROFIT
FIFO 28,000 67,000
LIFO 25,000 64,000
Average 27,000 66,000

1. What is the value of CI under FIFO method:

a. Tk. 28,000 (2000 x5+ 4,000 x 4.50)

b. Tk. 25,000
c. Tk. 26,000
d. Tk. 27,000
2. What is the value of COG under FIFO method:
a. Tk. 92,000
b. Tk. 56,000
c. Tk. 53,000 (5000 x 4 + 3,000 x 5 + 4000 x 4.50 )
d. Tk. 50,000 12

6 Md. Arshadul kabir, FCA

 3. What is the value of Profit under FIFO method

a. Tk. 92,000
b. Tk. 56,000
c. Tk. 67,000 (Tk. 120,000 – Tk. 53,000)
d. Tk. 50,000

May-June 2017, 1(b)

ABC Limited has provided following information to you:

8th March Purchase 500 Units Valued at BDT 5,000

12th March Purchase 100 Units Valued at BDT 1,120
17th March Sales 400 Units Valued at BDT 8,000
25th March Purchase 300 Units Valued at BDT 3,450
27th March Sales 250 Units Valued at BDT 5,000
There was an opening stock of 250 Units valued at BDT 2,000 on 1st March.
Calculate the gross profit for the month of March using each of the following methods of inventory valuation:
4x3=12
FIFO Method

Value of closing inventory = Total inventory – Sales quantity

= 250+ 500+ 100+ 300 – 400-250 = 500 units

Value of CI = BDT 3450 + BDT 1120 + BDT 1,000 = BDT 5,570

Cost of Goods sold = BDT 2,000 + BDT 1,500 + BDT 2,500 = BDT 6,000

Gross Profit = Sales – COGS

= (BDT 8,000 + 5,000) – BDT 6,000
= BDT 7,000
Or,

Sales = 400 (250 +150)

Sales = 250 (250 from the date of 8th march)

Closing Inventory = 100 Total value of Tk. 1,000

100 total value of Tk. 1,120
300 Total value of Tk. 3,450
500 total value of Tk. 5,570

Sales value (Tk. 8,000 + Tk. 5000) = Tk. 13,000

Value of COG
For 400 units = Tk. 2,000 + 150 x Tk. 10 = Tk. 3,500
Value of COG
For 250 units = 250 X Tk. 10 = Tk. 2,500
Gross Profit = Tk. 7,000

i. Calculate the value of Gross profit under FIFO method.

7 Md. Arshadul kabir, FCA

 a. Tk. 3,500
b. Tk. 6,000
c. Tk. 5,000
d. Tk. 7,000

Calculate the value of CI =

e. Tk. 4,575 ( Tk. 2,000 + Tk. 10 x 200+ 3450/300 * 50)
ii. LIFO
a. Tk. 3,500
b. Tk. 6,000
c. Tk. 5,000
d. Tk. 6,005

LIFO Method

Sales value (Tk. 8,000 + Tk. 5000) = Tk. 13,000

Value of COG
For 400 units = Tk. 1120 + 300 x Tk. 10 = Tk. 4,120
Value of COG
for 250 units = 250 X Tk.3,450/300 = Tk. 2,875
Gross Profit = Tk. 6,005

Calculate the value of CI =

a. Tk. 5,570 ( Tk. 3,450 + Tk. 1,120 + Tk. 1,000)

iii. Weighted average

iv. Which inventory valuation is most relevant for the decision making purpose. Explain your answer.

Nov- Dec 2016, Q # 2(a)

A wholesaler had an opening inventory of 750 units of item X valued at Tk. 80 each on 1 March

The following receipts and sales were recorded during march

04 March Received 180 Units at a cost of Tk. 85 per unit

18 March Received 90 Units at a cost of Tk. 90 per unit
24 March Sold 852 Units at a price of Tk. 110 per unit
Using the weighted average cost method of valuation, what was the cost of item X sold on 24 March

Average price = (750 x 80+ 180 x 85 + 90 x 90)/(750 + 180 + 90) = 81.76

COGS = 852 x 81.76 = Tk. 69,660
Profit = Sales – COGS = (852 x 110) – Tk. 69,660
= Tk. 24,060

Or.
Weighted average cost per unit = Total cost/Total unit
= (750* Tk. 80 + 180 * Tk. 85 + 90 * Tk. 90) / (750+180+90)
= Tk. 81.76

Total cost of units sold on 24 March = Tk. 81.76 * 852 Units

= Tk. 69,660

8 Md. Arshadul kabir, FCA

Value of Closing Inventory = (750 + 180 + 90 – 852) x Tk. 81.76 = Tk. 13,735

Nov- Dec 2014, Q # 07

a. During periods of rising prices, what will be the effect on the financial statements if FIFO
method is used instead of LIFO method for valuation of inventory? 4

1. No changes in profit
2. Profit will be increased
3. Profit will be decreased
4. No impact on profit and loss account

b. Errors occasionally occur during physical counting of the inventory. Identify the effects on the
financial statements of an overstatement of the ending inventory in the current period. If the
error is not corrected, how does it affect the financial statements for the following year?

Sales = 500

Less: COG = 150 or 100

GP = 350 or 400

Opening Inventory 100

Add: Purchase 200

Less: CI (150) (200)

1. No changes in profit
2. Profit will be increased in following period
3. Profit will be decreased in following period
4. No impact on profit and loss account

c. Yesinia Company uses the periodic inventory system to account for inventories. Information
related to Yesinia Company's inventory at October 31 is given below:

October 1 Beginning inventory 400 units @ Tk. 10.00 = Tk.4,000

October 8 Purchase 800 units @ Tk. 10.40 = 8,320
October 16 Purchase 600 units @ Tk. 10.80 = 6,480
October 24 Purchase 200 units @ Tk. 11.60 = 2,320
Total units and cost 2,000 units Tk. 21,120
Requirement:
a) Show computations to value the ending inventory using the FIFO cost method if 550 units
remain on hand at October 31.

9 Md. Arshadul kabir, FCA

 b) Show computations to value the ending inventory using the weighted-average cost method if
550 units remain on hand at October 31.
c) Show computations to value the ending inventory using the LIFO cost method if 550 units
remain on hand at October 31.

Solution of C :
a) Under FIFO method, calculation of closing inventory value: (the units remaining in ending
inventory are the ones purchased most recently.)

24 October 200 units @ Tk. 11.60 = Tk. 2,320

16 October 350 units @ Tk. 10.80 = Tk. 3,780
Total 550 units Tk. 6,100

b) Under average cost method, Calculation of closing inventory value:

Weighted average cost per unit = Total cost/Total units

= Tk. 21,120/2,000 units
= Tk. 10.56
So the value of closing inventory = 550 units × Tk. 10.56 = Tk. 5,808

c) Under LIFO method, calculation of closing inventory value (the units remaining are the ones
purchased earliest.)

01 October 400 units @ Tk. 10.00 = Tk. 4,000

08 October 150 units @ Tk. 10.40 = Tk. 1,560
550 units Tk. 5,560
May-June 2014
7. Khan & Company was formed on December 1, 2013. The following information is available from
Khan’s inventory record for Product X.
Units Unit Cost
January 1, 2013 (beginning inventory) 16,000 Tk.18.00

Purchases:
January 5, 2013 2,600 Tk.20.00
January 25, 2013 2,400 Tk.21.00
February 16, 2013 1,000 Tk.22.00
March 15, 2013 1,800 Tk.23.00
A physical inventory on March 31, 2013 shows 2,500 units in hand.
Required: Prepare schedules to compute the ending inventory at March 31, 2013 under each of the
following inventory methods:
a. FIFO, b). LIFO, c). Weighted‐average.
Show supporting computations

10 Md. Arshadul kabir, FCA

Nov-Dec 2013, Q # 02
a) Describe the advantages and disadvantages of the LIFO method. 4
b) ABC Company buys and sells cartoon boxes. Opening inventory was 500 boxes valued at Tk.
1,000. The transactions for latest quarter are shown below:
July'13 August'13 September'13
Purchase:
No. of boxes 2,000 2,400 2,000
Taka 5,000 6,240 5,400
Sales:
No. of boxes 2,200 1,800 1,600
Selling price was Tk. 3 per cartoon box throughout the quarter. Determine value of closing inventory
and gross profit at 30-09-2013 using periodic weighted average price and FIFO method.

Solution:
Periodic weighted average method:
Calculation of average cost per unit = Cost of opening inventories + Total cost of receipts in the
period Units of opening inventory +
Total units receipt in the period
= [Tk. 1000 + (Tk. 5000+ Tk. 6,240+ Tk. 5,400)]/[500+ (2,000+ 2,400+
2,000)]
= Tk. 2.56
Closing inventory in units = Opening inventory + Purchase – Sales
= 500 + (2,000+ 2,400+ 2,000) – (2,200+ 1,800 + 1,600)
= 1,300
Closing Inventory value in amount = 1,300 x Tk. 2.56
= Tk. 3,328
Calculation of Gross profit

Particulars Unit Amount in Tk.

Sales (Tk 3 per unit) 5,600 16,800
Less: COGS
Opening inventory (given) 500 1,000
Add: Purchase during the period (given) 6,400 16,640
Less: Closing Inventory at avg. cost (Tk. 1,300 (3,328) 14,312
2.56)
Gross Profit 2,488
FIFO method:
Calculation of closing inventory value
Particulars Unit Total cost Per unit
cost
Opening inventory (given) 500 1,000 2.00
Add: Purchase during the period (given) 2,000 5,000 2.50
2,400 6,240 2.60
2,000 5,400 2.70
Total quantity available for sale 6,900
Less: Sales 5,600 16,800 3.00
Closing inventory 1,300 3,510 2.70

Calculation of Gross profit

11 Md. Arshadul kabir, FCA

 Particulars Unit Amount in Tk.
Sales (Tk 3 per unit) 5,600 16,800
Less: COGS
Opening inventory (given) 500 1,000
Add: Purchase during the period (given) 2,000+ 2,400+ 2,000 16,640
=6,400
Less: Closing Inventory 1,300 (3,510) 14,130
Gross Profit 2,670

May-June 2015
2. (a) A business buys and sells boxes of item X. The transactions for the third quarter are shown below:
Opening Inventory 400 boxes valued at Tk.1,000
Purchases Sales
July 1,000 Tk.2,600 1,100
August 1,200 Tk.3,300 900
September 1,000 Tk.3,000 800

The business values its inventories using a periodic weighted average price calculated at the end of each
quarter. Calculate the value of inventory at the end of September.

(b) A wholesaler had an opening inventory of 330 units of product T valued at Tk. 168 each on 1 April.
The following receipts and sales were recorded during April:
(i) 4 April Received 180 units at a cost of Tk. 174 per unit
(ii) 18 April Received 90 units at a cost of Tk. 186 per unit
(iii) 24 April Sold 432 units at a price of Tk. 220 per unit
Using the LIFO valuation method, what was the gross profit earned from the units sold on 24 April? 6

12 Md. Arshadul kabir, FCA

1. A wholesaler had an opening inventory of 750 units of geronimo valued at £80
each on 1st February.
The following receipts and sales were recorded during February.

4 February Received 180 units at a cost of £85 per unit

18 February Received 90 units at a cost of £90 per unit

24 February Sold 852 units at a price of £110 per unit

Using the FIFO valuation method, what was the cost of the units of geronimo sold on
24 February?

A. £68,160
B. £68,670
C. £69,960
D. £93,720

Workings:
The FIFO method uses the cost of the older batches first.

Cost of units sold on 24 February £

750 units @ £80 60,000

102 units @ £85 8,670

852 units 68,670

If you answered £68,160 you valued all of the units sold at the opening inventory
cost of £80 per unit. However, there are only 750 units held at this cost. The cost of
the remainder of the units sold must be taken from the next batch received.

13 Md. Arshadul kabir, FCA

2. At the beginning of week 12 there were 500 units of component J held in the
stores. 200 of these components had been purchased for £6.25 each in week 11
and 300 had been purchased for £6.50 each in week 10.
On day 3 of week 12 a further 150 components were received into stores at a
purchase cost of £6.60 each.

The only issue of component J occurred on day 4 of week 12, when 90 units were
issued to production.

Using the FIFO valuation method, what was the value of the closing inventory of
component J at the end of week 12?

A. £585
B. £594
C. £3,596
D. £3,605
Workings:
£3,605

Components issued on day 4 = 90 from week 10 receipts.

Closing inventory week 12:

Remaining 210 components from week 10 @ £6.50 1,365

200 components from week 11 @ £6.25 1,250

150 components from week 12 @ £6.60 990

560 3,605

3. In a period of falling prices, four students have recorded the cost of sales of
commodity X. One student has used the FIFO method of inventory valuation and
one has used the LIFO method. The other two students have used an average
cost method, using the periodic and cumulative weighted average basis
respectively.
The gross profits recorded by the students were as follows:

Student Recorded gross profit (£)

A 12,600

B 13,400

C 14,500

D 15,230

14 Md. Arshadul kabir, FCA

 Which student was using the LIFO method of inventory valuation?

A. Student A
B. Student B
C. Student C
D. Student D

Workings:
Student D

The LIFO method charges the latest prices paid to cost of sales. In a period of falling
prices the latest prices will be the lowest prices. Therefore, the student using the
LIFO method would record the lowest cost of sales and the highest gross profit.

4. A wholesaler buys and resells a range of items, one of which is the Kay. Each Kay
is resold for £3 per unit and opening inventory for June was 400 units valued at
£1.80 per unit. The wholesaler purchased a further 600 units on 10 June for
£2.10 per unit, and sold 800 units on 25 June. What gross profit would be
recorded for the sale of Kays during June, using the LIFO method of inventory
valuation?
LIFO gross profit

A. £840
B. £720
C. £780
D. £1,620

£ £

Sales value £3 x 800 2,400

Less cost of sales:

600 £2.1x0 1,260

200 £1.8x0 360

(1,620)

Gross profit 780

5. Which of the following are true?

i. With FIFO, the inventory valuation will be close to replacement cost
ii. With LIFO, inventories are issued at a price which is close to the current
market value

15 Md. Arshadul kabir, FCA

 iii. Decision making can be difficult with both FIFO and LIFO because of the
variations in prices
iv. A disadvantage of the weighted average method of inventory valuation is
that the resulting issue price is rarely an actual price that has been paid and
it may be calculated to several decimal places.

A. (i) and (ii) only

B. (i), (ii) and (iv) only
C. (i) and (iii) only
D. (i), (ii), (iii) and (iv)

Workings:
D (i), (ii), (iii) and (iv)

With FIFO, the oldest prices are charged first to cost of sales and inventory is valued
at the latest prices paid, which will be close to replacement cost.

16 Md. Arshadul kabir, FCA