BKAR1013 EXERCISE IN CLASS -INVENTORY

NoRis Batik Bhd (NBB) was established in year 2012 to cater the demand of batik fabric design
for corporate events, social events as well as public sector official functions. NBB has three
codes of batik inventories namely; Code BE1, Code BD2 and Code BM3. The description for
each of its inventory is as follows:

Code Descriptions
Code BE1 Exclusive design and pattern, the inventory under this Code is ordered from
different suppliers based on specific demand by customers.
Code BD2 Always ready in stock to meet up the customer demand over time. The pattern
selection is based on a trendy pattern booming in a market. The old stock will
first to be released to customers to ensure they are not outdated in a market.
Code BM3 The pattern that always gets booked and does not out of date. Company will
always keep the stock of this all-time batik design for their regular customers
and wholesalers. The price for this design is also stable and unchanged. Thus,
the cost of the inventory is determined from the cost of similar items
purchased during the period.

NBB applies perpetual inventory system to update its inventory and uses net method to record
the purchase of inventory. For sales transactions, NBB applies the F.O.B destination as its freight
term policy. The company's reporting period ends on 31 December. The information of
inventories and the transactions that took place on 1 December 2016 and onwards are as follows:

Date Detail
1 Dec Beginning inventories:
Code BE1:
(i) ‘Hydreangea’ flower pattern, 150 meters, RM135/meter.
(ii) ‘Tulips’ flower pattern, 95 meters, RM125/meter.
Code BD2:
140 meters, RM28/meter

Code BM3:
500 meters, RM25/meter

6 Dec Purchased 100 meters of batik fabric for inventory Code BD2 at RM32 per
meter. Freight costs incurred was RM500. F.O.B shipping point.

10 Dec Sold 175 meters of batik Code BD2 at RM55 per meter to customers.

15 Dec Discovered defects on batik design, NBB returned the remaining batik fabric of
inventory Code BD2 to the supplier. This item was recently purchased on 6
December 2016.

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 Purchased 150 meters different pattern of batik for the same Code of inventory
from the same supplier at the same price. Additional cost incurred includes
RM600 costs on freight. F.O.B shipping point.

16 Dec Sold to customer 100 meters of batik exclusive Code BE1 with ‘Hydreangea’
flower pattern. The customer was charged at RM199 per meter.

20 Dec Sold 95 meters of batik fabric Code BD2 for RM58 per meter.

24 Dec Sold 90 meters of batik fabric Code BM3 for RM50 per meter.

25 Dec 25 meters of batik fabric Model BD2 were returned by a customer. This fabric
was identified as released for sale from the beginning inventory.

27 Dec Sold the balance of batik Code BE1 to customers at the same price as of 16
December 2016.

29 Dec Purchased 100 meters batik fabric Code BD2 at RM35 per meter. The purchase
was on credit with 2/10, n/60 term. F.O.B destination.

REQUIRED:

(a) Identify the suitable cost flow assumption that should be applied by NBB to measure its
batik inventory cost for Code BE1 and BM3. Give justification(s) for each of your
answer based on the information provided.

(b) Prepare a schedule, to calculate the cost of inventory on hand at 31 December 2016 and
the cost of sales for the month of December 2016 for the batik inventory Code BD2 using
FIFO cost flow assumption. Show your working clearly by following the given format:

  Purchases Cost of sales Ending balance

Total Total Total

Unit Unit Unit Unit Unit Unit
Date Detail cost cost cost
(Meter) Cost (Meter) Cost (Meter) Cost
(RM) (RM) (RM)

Beginning
Dec 1            
inventories

(c) Give TWO (2) advantages to a company when applying perpetual inventory system to
record inventory on hand.

(d) What is the cost flow assumption that will result the same value of inventory and cost of
goods sold at the end of the month whether a perpetual or periodic system is used.

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(e) It is expected that the purchase price of inventory will keep increasing. If NBB wants to
minimize the income in order to pay less tax, suggest with explanation, which inventory
cost flow assumptions (FIFO or average cost) that is more relevant.

ANSWER

Cod Cost flow Justification

e assumption
Code Specific This cost flow assumption can be used where it is
BE1 identification method possible to assign costs to inventory. 
 Under this method costs are individually identified for
each inventory item as this batik design is exclusive and
ordered made from different suppliers based on specific
demand by customers. Thus, there are costly and easily
distinguishable items. 

Code Weighted average There are large numbers of stock and there are almost
BM3 method homogeneous.
The price for this design is also stable and unchanged. 
the cost of the inventory is determined from the cost of
similar items purchased during the period. 

(6 X1 = 6 Marks)

(c) TWO (2) advantages applying perpetual inventory system:

(i) The perpetual inventory system provides a continuous record of the balance in both the
Inventory and Cost of Goods Sold accounts. 
(ii) Better control as regular reconciliation is carried out to ensure the accuracy and
completeness of accounting records. 
OR any other suitable answer
(4x0.5= 2 Marks)

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(d) What is the cost flow assumption that will result the same inventory and cost of goods sold
value at the end of the month whether a perpetual or periodic system is used.

The cost flow assumption is FIFO. 

(1x 1= 1 Marks)

(e) The company may want to lower the net income, by using the average cost method.  because
during periods of rising prices, the use of FIFO (as compared with average cost) will result in higher
inventory cost, lower cost of goods sold, and higher gross profit, hence higher net income, thus higher
income taxes.

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 Q (b)  Purchases Cost of sales Ending balance    

Unit Total cost Total cost Total cost

Date Detail Unit (M) Unit (M) Unit Cost Unit (M) Unit Cost
Cost (RM) (RM) (RM)    

1-Dec Begin. inventories             140 28 3,920  

6-Dec Purchase 100 32 3,200      140 28 3,920   

  Freight Cost     500      100 37 3,700 

        3,700       240   7,620    

   Cost per unit     37                

10-
Sold       140 28 3,920 0 28 0
Dec 

          35 37 1,295 65 37 2,405 

          175   5,215 65   2405    

15-
Purchased return -65 37 -2,405     150 36 5,400
Dec    

  Purchased 150 32 4,800               

  Freight Cost     600               

        5,400                

   Cost per unit     36                

20-
Sold       95 36 3,420 55 36 1,980
Dec 

                         

25-
Sales return       -25 28 -700 25 28 700
Dec 

                55 36 1,980 

                80   2,680    

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 29-
Purchase 100 35 3,500     25 28 700
Dec    

  Less: Discount     -70      55 36 1,980   

        3,430       100 34.30 3,430   

  Cost per unit     34.30       180   6,110    

 
  Balance     10,125     7,935   6,110 


(55 X0.2 = 11 Marks)

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Aura Marble Bhd, which is located in Shah Alam, Selangor selling marble dining table. The
inventory recording system for Aura Marble Bhd is periodic inventory system. The
company’s financial year-end is on 31 December 2021.

The following are transactions of Aura Marble Bhd during the year 2021:

Date Transactions
10 January Purchased 70 units of dining table from Kemunting Furniture Sdn Bhd for
RM750 per unit.
25 March Sold 100 units of dining table to Kokos Sdn Bhd for RM1,200 per unit.

20 May Purchased 50 units of dining table from Kemunting Furniture Sdn Bhd for
RM600 per unit.

15 August Purchased 300 units of dining table from Syarikat Perabut Selatan for
RM825 per unit.

20 August Sold 150 units of dining table to Syarikat Tanjung for RM960 per unit.

1 October Purchased 200 units of dining table from Westo Furniture Sdn Bhd for
RM900 per unit.

15 October Sold 150 units of dining table to Kolumpo Sdn Bhd for RM1,230 per unit.

20 October Sold 50 units of dining table to Syarikat Wong for RM1,350 per unit.

Additional information:

1. As at 1 January 2021, 50 units of marble dining table at the cost price of RM540 remain
in the warehouse.
2. Operating expenses incurred for the year was RM15,000.
3. Tax expense for the current year was RM5,000.

REQUIRED:

(a) Calculate the ending inventory for marble dining table using FIFO method.
(6 Marks)

(b) Prepare the Statement of Profit or Loss and Other Comprehensive Income of Aura
Marble Bhd for the year ended 31 December 2021.
(7 Marks)

(c) It is expected that the purchase price of inventory will keep increasing. If Aura
Marble Bhd wants to minimize the income in order to pay less tax, suggest with

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 explanation, which inventory cost flow assumptions (FIFO or average cost) that is
more relevant.
(2 Marks)
a) COST OF INVENTORY – FIFO

Unit available = opening balance + purchases

Bal 50 + 70 + 50 + 300 + 200 = 670
Unit Sales = 100+150+150+50 = 450

UNIT INVENTORY AVAILABLE = 670

UNIT SALES = 450
UNIT ENDING INVENTORY = 220

FIFO: 200u x 900 = RM180,000

20u x 825 = 16,500
220 u 196,000
12 x 0.5 = 6
b) Aura Marble Bhd
Statement of Profit or Loss and Other Comprehensive Income
For the year enden 31 December 2021

RM RM
Sales* 516,000
Opening inventory 27,000
Purchases** 510,000
Cost of goods available for sale 537,000
-Ending inventory 196,500
COGS 340,500
Gross Profit 175,500
Operating Expenses 15,000
Profit before tax 160,500
Tax 5,000
Profit after tax 155,500
*Sales
Unit Sales SP/U RM
100 1,200 120,000
150 960 144,000
150 1,230 184,500
50 1,350 67,500
516,000

**Purchases
Unit purchased Kos/unit Purchases
70 750 52,500
50 600 30,000
300 825 247,500
200 900 180,000

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 510,000

14 x 0.5 = 7

c) The company may to lower the net income, by using the average cost method.  because
during periods of rising prices, the use of FIFO (as compared with average cost) will result
in higher inventory, lower cost of goods sold, and higher gross profit, hence higher net
income, and higher income taxes. 
Generally, wholesale prices rise over time, so the oldest inventory items are normally the least
expensive. COGS is minimise by using the FIFO method during periods of rising prices. Under FIFO,
you assign inventory costs in purchase date sequence. Because FIFO has you subtract the cost of
your oldest -- and therefore least expensive -- inventory from sales, your gross income is higher. 