Question

Topbaker Limited has just begun buying and selling 'Baking Powdeґ as an additional product to its main business of providing baking care goods and services. The powder is purchased in bulk and resold in smaller quantities to customers. Ben, the manager, supplies the following inventory information that relates to the month of January 2019. The company operates on an accruals basis and uses a perpetual, First in First Out (FIFO) inventory method (assume that all sales are on credit and ignore GST). Date Details ("Baking Powder" Inventory) 1-Jan Opening Balance: 30 kg's at $2.10/kg 5-Jan Purchases: 45 kg's at $2.20/kg 10-Jan Sales: 52 kg's at $2.80/kg 22-Jan Purchases: 34 kg's at $2.30/kg 31-Jan Sales: 19 kg's at $2.80 /kg Required: (a) Prepare an inventory card for the "Baking Powder" for the month ended 31 January 2019 (please disclose the total closing inventory balance in dollar terms) (b) Calculate the total cost of goods sold and gross profit from the sale of "Baking Powder" for the month ended 31 January 2019. Describe the effect on the gross profit and closing inventory balance for January 2019 if Topbaker Limited had used the weighted average cost method for recording inventory rather than the First In First Out method (no calculations required). (c)

Answer 1

(a)

Inventory card (For the month of January, 2019)

	Purchases			Sales			Balance
Date	Quantity	Rate	Value	Quantity	Rate	Value	Quantity	Rate	Value
Jan. 1							30	2.10	63
Jan. 5	45	2.20	99				30	2.10	63
							45	2.20	99
Jan. 10				30	2.10	63
				22	2.20	48.4	23	2.20	50.6
Jan. 22	34	2.30	78.2				23	2.20	50.6
							34	2.30	78.2
Jan. 31				19	2.20	41.8	4	2.20	8.8
							34	2.30	78.2

(b)

Cost of goods sold = 63 + 48.4 + 41.8

= $153.2

Sales = 52 x 2.80 + 19 x 2.80

= $198.8

Gross profit = Sales - Cost of goods sold

= 198.8 - 153.2

= $45.6

(c)

Inventory card (For the month of January, 2019) (Weighted average method)

	Purchases			Sales			Balance
Date	Quantity	Rate	Value	Quantity	Rate	Value	Quantity	Rate	Value
Jan. 1							30	2.10	63
Jan. 5	45	2.20	99				75	2.16	162
Jan. 10				52	2.16	112.32	23	2.16	49.68
Jan. 22	34	2.30	78.2				57	2.24	127.88
Jan. 31				19	2.24	42.56	38	2.24	85.32

Cost of goods sold = 112.32 + 42.56

= $154.88

Sales = 52 x 2.80 + 19 x 2.80

= $198.8

Gross profit = Sales - Cost of goods sold

= 198.8 - 154.88

= $43.92

If weighted average method is used, cost of goods sold will increase and gross profit will increase.

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