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Accounting Quiz- CIMA

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yasaswi gomes

My grammar is 💯 good I

5110 Points Posted on 04 April 2021

A ltd. purchased raw materials consisting of 500 metal sheets to manufacture car bodies. Out of these metal sheets 50% is considered as waste to manufacture two car bodies. It also paid for freight charges to transport them to the factory. Where will that amount be included in the cost of inventory?

A. Cost of finished inventory

B. Cost of raw materials

C. Cost of work in progress

D. Cost of closing inventory

Replies (3)

Quick Summary

This discussion tackles a CIMA accounting quiz question about where to include freight charges for raw materials in inventory costs. While some argue for including it in finished goods for accurate pricing, especially in job costing, the consensus leans towards including it in Work in Progress (WIP). The explanation details how freight charges are allocated to both WIP and finished goods, with remaining costs carried forward to the next period's WIP.

CA. Sourav Sarkar

Chartered Accountant

16188 Points Posted on 04 April 2021

Cost of WIP

yasaswi gomes

My grammar is 💯 good I

5110 Points Posted on 04 April 2021

WIP includes opening WIP and freight charges will be carried to finished goods. However, the transport costs are neither period nor recurring costs but batch costs. If we can include it in WIP, the closing WIP will hold some of the charges and these charges will be absorbed into next batch WIP (truck and auto fares differ). It is prudent to include these costs into finished goods based on job costing to derive the correct selling price of the product. However, Indian cost accounting principle is suggesting to include it in WIP alone.

Purchases a/c 1000 (1 unit @ 1₹)

Freight a/c 100

To Bank a/c 1100

and

Opening WIP 2000

New WIP 1000

Freight 100

Total = 3100

Finished goods= 3050

so, based on FIFO, 50 closing stock WIP above is from new batch. Allocate 100 freight charges to 950 units and 50 units of closing WIP equally. In the next period, opening WIP will be absorbing new batch freight charges. In reporting both WIP and finished goods is correct.