5 th Year Accounting 23 rd January 2013. Stock Valuation Why do we value stock? What use is the value of stock? What are the two ways of valuing stock?

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Presentation transcript:

5 th Year Accounting 23 rd January 2013

Stock Valuation Why do we value stock? What use is the value of stock? What are the two ways of valuing stock? Cost & Net Realisable Value (NRV)

Stock Valuation If we value stock using cost, we need to know how much materials cost. Material prices can change throughout the year. We need to know which materials were used and exactly how much they cost Otherwise costing will be inaccurate and will affect profit

First In, First Out (FIFO) FIFO is a method of valuing stock It assumes that when stock has been purchased at different prices, the first item received was the first to be issued. This means that closing stock will be valued at the most recent price(s)

Stock Valuation - Example Aircon Ltd DateReceipts Units Cost per Unit Issued Units Aug. 1Opening Stock 100€40 Aug. 3Receipts200€50 Aug. 7Receipts400€52 Aug. 10Issued300 Aug. 15Receipts120€48 Aug. 20Receipts100€50 Aug. 29Issued550

Aircon Ltd. (a) Calculate using FIFO, the value of stcok issued during August (b) Calculate the closing stock valuation at 31 August

(a) Value of Stock Issued (FIFO) On Aug. 10, Aircon issued 300 units. When were these units purchased and how much did they cost?  Aug units X €40=€4,000  Aug units X €50=€10,000 €14,000

(a) Value of Stock Issued (FIFO) On Aug. 29, Aircon issued 550 units. When were these units purchased and how much did they cost?  Aug units X €52=€20,800  Aug units X €48= €5,760  Aug units X €50= €1,500 €28,060 Total Value: €14,000 + €28,060 = €42,060

(b) Value of Closing Stock How many units are left at the end of the year? Receipts920 units Issued850 units Closing Stock 70 units These units must be from the most recent receipts: 70 units X €50 = €3,500

Higher Level What about other costs involved in production? What other costs have we looked at? We need to include materials, labour and overheads in the value of closing stock We also need to value Work-In-Progress (WIP) and finished goods separately.

(a) Value of Stock Issued Aug 10: 2700 units issued:  1000 units X €40 (Aug 1)=€40,000  1,700 units X €50 (Aug 3)=€85,000 Aug 29: 5,200 units issued:  300 units X €50 (Aug 3)=€15,000  4,000 units X €52 (Aug 7)=€208,000  900 units X €48 (Aug 15)=€43,200 €391,200

(b) Value of Closing Stock of Raw Materials Opening Stock1,000 Receipts8,200 9,200 Issued(7,900) Closing Stock1,300 units 1,000 units X €50 = €50, units X €48 = €14,400 €64,400

(c) Overhead absorption rate Total labour hours: Labour Costs=50,000 hours Labour Rate Overhead rate: Production Costs = €3 per hour Labour Hours

Stock Valuation (Higher Level) (c) Closing Stock of Work – in Progress 200 units: Raw materials: 200 X 3units X€48 = €28,880 Labour:200 X 5hours X €12 = €12,000 Production Costs 200 X 5hours X €3 = €3,000 €43,880

(d) Value of Finished Goods 1,000 units Raw materials: 100 X 3units X€48 = €115, X 3units X€52 = €140,400 Labour:1000 X 5hours X €12 = €60,000 Production Costs 1000 X 5hours X €3= €15,000 €330,600

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