A few years ago, Leonardo Asti set up a successful business in the UK called Amoretti Ltd. The company specialises in making almond biscuits from an old family recipe handed down from one generation to another. The ingredients for the biscuits must be kept dry and cool. Therefore, they are kept in the Chill Store until required by the Processing Department. The price of almonds has been rising due to poor harvests. The opening inventory on 1 July 2018 was 500 kg which was valued at £1,500 (£3.00 per kg). On 6 July, the Chill Store issued 250 kg to the Processing Department. On 10 July, the Chill Store received a delivery of 500 kg at £3.50 per kg. Subsequently, the Chill Store issued 500 kg to the Processing Department on 13 July and a further 200 kg on 20 July. On 21 July, the Chill Store took delivery of 250 kg at £4.00 per kg. On 27 July, the Chill Store issued 100 kg to the Processing Department. You have been asked whether the company should use the first in, first out (FIFO) method or the weighted-
A few years ago, Leonardo Asti set up a successful business in the UK called Amoretti Ltd. The company specialises in making almond biscuits from an old family recipe handed down from one generation to another. The ingredients for the biscuits must be kept dry and cool. Therefore, they are kept in the Chill Store until required by the Processing Department.
The price of almonds has been rising due to poor harvests. The opening inventory on 1 July 2018 was 500 kg which was valued at £1,500 (£3.00 per kg). On 6 July, the Chill Store issued 250 kg to the Processing Department. On 10 July, the Chill Store received a delivery of 500 kg at £3.50 per kg. Subsequently, the Chill Store issued 500 kg to the Processing Department on 13 July and a further 200 kg on 20 July. On 21 July, the Chill Store took delivery of 250 kg at £4.00 per kg. On 27 July, the Chill Store issued 100 kg to the Processing Department.
You have been asked whether the company should use the first in, first out (FIFO) method or the weighted-average cost (WAC) method for pricing issues and valuing inventory.
Required
- Record the entries in the inventory account using the first in, first out (FIFO) method for pricing issues and valuing the balance of inventory after each
- Record the entries in the inventory account using the weighted-average cost (WAC) method for pricing issues and valuing the balance of inventory after each
- Prepare a simple profit statement for the month comparing the gross profit under each Assume the revenue for the month was £7,000.
- Interpret your profit statement by recommending which of the two methods you used in (a) and
(b) above will give the company a higher gross profit for the month. Justify your advice by comparing and contrasting the advantages of the two methods.
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