Advanced: Comparison of FIFO and weighted average, stock valuation methods On 1 October Bland Ltd opened a
Question:
Advanced: Comparison of FIFO and weighted average, stock valuation methods On 1 October Bland Ltd opened a plant for making verniers. Data for the first two months’ operations are shown below:
At 31 October the units in closing work in progress were 100% complete for materials and 80% complete for labour. At 30 November the units in closing work in progress were 100% complete for materials and 50% complete for labour.
The company’s policy for valuation of work in progress is under review. The board of directors decided that two alternative profit and loss state¬ ments should be prepared for October and Novem¬ ber. One statement would value work in progress on a weighted average cost basis and the other would adopt a first-in, first-out basis. Fixed costs would be absorbed in proportion to actual labour costs in both cases.
For October both bases gave a closing work in progress valuation of £55 500 and a profit of £10 800. When the statements for November were presented to the board the following suggestions were made:
(1) ‘We wouldn’t have a problem over the valu¬ ation basis if we used standard costs.’
(2) ‘Standard cost valuation could be misleading for an operation facing volatile costs; all data should be on a current cost basis for manage¬ ment purposes.’
(3) ‘It would be simpler and more informative to go to a direct cost valuation basis for manage¬ ment use.’
(4) ‘All that management needs is a cash flow report; leave the work in progress valuation to the year-end financial accounts.’
Requirements:
(a) Prepare profit and loss statements for Novem¬ ber on the two alternative bases decided by the board of directors, showing workings.
(9 marks)
(b) Explain, with supporting calculations, the differences between the results shown by each statement you have prepared. (6 marks)
(c) Assess the main strengths and weaknesses of each of the suggestions made by the directors, At 31 October the units in closing work in progress were 100% complete for materials and 80% complete for labour. At 30 November the units in closing work in progress were 100% complete for materials and 50% complete for labour.
The company’s policy for valuation of work in progress is under review. The board of directors decided that two alternative profit and loss state¬ ments should be prepared for October and Novem¬ ber. One statement would value work in progress on a weighted average cost basis and the other would adopt a first-in, first-out basis. Fixed costs would be absorbed in proportion to actual labour costs in both cases.
For October both bases gave a closing work in progress valuation of £55 500 and a profit of £10 800. When the statements for November were presented to the board the following suggestions were made:
(1) ‘We wouldn’t have a problem over the valu¬ ation basis if we used standard costs.’
(2) ‘Standard cost valuation could be misleading for an operation facing volatile costs; all data should be on a current cost basis for manage¬ ment purposes.’
(3) ‘It would be simpler and more informative to go to a direct cost valuation basis for manage¬ ment use.’
(4) ‘All that management needs is a cash flow report; leave the work in progress valuation to the year-end financial accounts.’
Requirements:
(a) Prepare profit and loss statements for Novem¬ ber on the two alternative bases decided by the board of directors, showing workings.
(9 marks)
(b) Explain, with supporting calculations, the differences between the results shown by each statement you have prepared. (6 marks)
(c) Assess the main strengths and weaknesses of each of the suggestions made by the directors, confining your assessment to matters relating to the effects of work in progress valuation on performance measurement.
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