CASE STUDY 6 - INVENTORIES Max's decision to invest in the group of assets he located has allowed him to change the focus of his work slightly. Max will now have extra time to focus on improving the success of his DIY Clean Air Turbo System kit. The addition of this extra product has caused Max to review the way he records his inventory. Max's client base has expanded so much that he now supplies both corporate fleets and individual customers. Max has previously used the periodic system to record inventory as he found he didn't have to think too hard and only had to do a stock take every now and then. Max also recalled from his studies at University that ... the First-In First-Out (FIFO) method will record the highest ending inventory value... and has always made use of the FIFO method for that reason. Required 1. Max has provided you with information below and asked you to calculate the COS and Gross Profit for the two items listed. Max began the month with no stock of either product. Max's latest stock take revealed that there were 62 units of Product 1 and 8 units of Product 2 still on hand. Product 1 - Clean Power kits are a spare parts option to increase the energy output and fuel economy of existing engines. Each unit now sells for $199 Date Purchases (units) Sales (units) August 3 100 @ $80 15 45 35 @ 590 30 25 @ $105 9 11 14 16 18 21 24 26 28 29 31 15 30 45 @ S100 60 @ $120 50 5510. Rctumed) TOTAL 260 192 Aug - Product 2 - The DIY Clean Air Turbo System is an off the shelf package including everything you need to install a new Turbo system. The packs sell for $2,200 each. Date Purchases Sales (units) (units) 25 @ $1,000 2 mm mumma 5 5 @ $1,060 8 www 12 10 @ $1,092 15 (2) Returned undamaged 18 21 mm 22 8 @ $1153.50 24 mm 26 11171 11: 40 TOTAL 48 Calculations Part 1. FAI-MAX CASE STUDY: TOPIC 5 Required 2. Max is reasonably happy with the results but seems to remember that while the periodic system of inventory recording was much easier it had some problems. Discuss the appropriateness of the Perpetual and Periodic recording systems for the two products you have looked at and provide reasons to support your conclusions. (You may find that one system is not appropriate for both products.) While you were busy preparing this report for Max he has once again gone back to his somewhat incomplete notes from University and has managed to dig up the following comments. ..a perpetual system of recording inventory is able to provide more information... ...using the weighted average method is more likely to produce a consistent profit figure over time... Max likes the sound of these ideas and would like to see how they work. Max still believes the FIFO system would be best for the Clean Power kits as he usually sells the oldest stock first, but would like you to record the DIY packs using the weighted (moving) average method as he makes more profits on their sales. 3. Complete the stock cards provided below using the same information Max above as needed. Purchases (In Quantity Unit Total Cost Cost Sales (Out) Quantity Unit Total Cost Cost Balance Quantity Unit Cost Date Total Aug 3 While you were busy doing the calculations Max has had one his helpers physically count the stock twice to make sure his earlier stock take was correct. The results of this count were that there are only 61 Clean Power Kits on hand. 4. Show the General Journal entry(s) (and any calculations) to display the impact of this count on the information you have provided for Max in Parts 1 and 3. DATE PARTICULARS P/R DEBIT $ CREDIT $ Max has also received information that his suppliers for Turbo Kits have begun producing a new series which is more sensitive and has better performance in hot weather conditions. This means that Max now has to sell the rest of his DIY packs at discounted prices as all his customers are starting to ask for the new series with better performance. From now on Max will only be able to ssell the remaining packs for $1,100 with $24.95 shipping costs. 5. Show the General Journal entry (and any calculations) to display the impact of this on the information you have provided for Max in Parts 1 and 3 and explain to Max the reason an entry is required. DATE PARTICULARS P/R DEBIT $ CREDIT $ CASE STUDY 6 - INVENTORIES Max's decision to invest in the group of assets he located has allowed him to change the focus of his work slightly. Max will now have extra time to focus on improving the success of his DIY Clean Air Turbo System kit. The addition of this extra product has caused Max to review the way he records his inventory. Max's client base has expanded so much that he now supplies both corporate fleets and individual customers. Max has previously used the periodic system to record inventory as he found he didn't have to think too hard and only had to do a stock take every now and then. Max also recalled from his studies at University that ... the First-In First-Out (FIFO) method will record the highest ending inventory value... and has always made use of the FIFO method for that reason. Required 1. Max has provided you with information below and asked you to calculate the COS and Gross Profit for the two items listed. Max began the month with no stock of either product. Max's latest stock take revealed that there were 62 units of Product 1 and 8 units of Product 2 still on hand. Product 1 - Clean Power kits are a spare parts option to increase the energy output and fuel economy of existing engines. Each unit now sells for $199 Date Purchases (units) Sales (units) August 3 100 @ $80 15 45 35 @ 590 30 25 @ $105 9 11 14 16 18 21 24 26 28 29 31 15 30 45 @ S100 60 @ $120 50 5510. Rctumed) TOTAL 260 192 Aug - Product 2 - The DIY Clean Air Turbo System is an off the shelf package including everything you need to install a new Turbo system. The packs sell for $2,200 each. Date Purchases Sales (units) (units) 25 @ $1,000 2 mm mumma 5 5 @ $1,060 8 www 12 10 @ $1,092 15 (2) Returned undamaged 18 21 mm 22 8 @ $1153.50 24 mm 26 11171 11: 40 TOTAL 48 Calculations Part 1. FAI-MAX CASE STUDY: TOPIC 5 Required 2. Max is reasonably happy with the results but seems to remember that while the periodic system of inventory recording was much easier it had some problems. Discuss the appropriateness of the Perpetual and Periodic recording systems for the two products you have looked at and provide reasons to support your conclusions. (You may find that one system is not appropriate for both products.) While you were busy preparing this report for Max he has once again gone back to his somewhat incomplete notes from University and has managed to dig up the following comments. ..a perpetual system of recording inventory is able to provide more information... ...using the weighted average method is more likely to produce a consistent profit figure over time... Max likes the sound of these ideas and would like to see how they work. Max still believes the FIFO system would be best for the Clean Power kits as he usually sells the oldest stock first, but would like you to record the DIY packs using the weighted (moving) average method as he makes more profits on their sales. 3. Complete the stock cards provided below using the same information Max above as needed. Purchases (In Quantity Unit Total Cost Cost Sales (Out) Quantity Unit Total Cost Cost Balance Quantity Unit Cost Date Total Aug 3 While you were busy doing the calculations Max has had one his helpers physically count the stock twice to make sure his earlier stock take was correct. The results of this count were that there are only 61 Clean Power Kits on hand. 4. Show the General Journal entry(s) (and any calculations) to display the impact of this count on the information you have provided for Max in Parts 1 and 3. DATE PARTICULARS P/R DEBIT $ CREDIT $ Max has also received information that his suppliers for Turbo Kits have begun producing a new series which is more sensitive and has better performance in hot weather conditions. This means that Max now has to sell the rest of his DIY packs at discounted prices as all his customers are starting to ask for the new series with better performance. From now on Max will only be able to ssell the remaining packs for $1,100 with $24.95 shipping costs. 5. Show the General Journal entry (and any calculations) to display the impact of this on the information you have provided for Max in Parts 1 and 3 and explain to Max the reason an entry is required. DATE PARTICULARS P/R DEBIT $ CREDIT $