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- Dear Ben,
- Here's my work
- ITEM 7 CALCULATIONS
- -----------------------------------------------------------------------------------------------
- Item 7 "The closing inventories are valued at a cost of £67,600 on a first-in-first out basis. This includes one batch of produce that cost £4,300 and has been damaged. It can be sold for £2,000 as animal feed if it is repackaged at a cost of £500."
- Additionally...
- Item 3 "No provision for depreciation has been made for the year ended 30 September 2013. Company policy is to calculate depreciation on the straight-line method. Machinery is depreciated at 20% p.a. assuming a scrap value of 5% of cost. Fixtures and fittings are depreciated at 25% p.a. assuming a zero scrap value. Machinery depreciation is charged to cost of sales and fixtures and fittings depreciation is charged to Administration costs."
- Item 2 "On 31 March 2013, some obsolete machinery was sold for £26,000. It had cost £40,000 and £15,200 had been provided as depreciation up to 30 September 2012. The company’s policy is not to charge depreciation on an asset in the year of its disposal. No entries have been made in the accounts relating to the disposal except to debit the bank account and credit a non-current asset disposals account with the proceeds."
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- Since Item 3 says that "Machinery depreciation is charged to cost of sales", this Machinery Depreciation has to be calculated, thus...
- Depreciation per annum = ( Cost − Residual Value ) / Useful Life
- - or -
- Depreciation per annum = ( Cost − Residual Value ) x Rate of depreciation
- But, with item 2 taken into consideration, the original TOTAL machinery value, £290k, has the original value of the kit that was sold in Item 2, £40k, removed from it, thus..
- Cost = Original Cost of Equipment - Original Cost of Equipment Sold
- = £290,000 - £40,000
- = £250,000
- So, that having been done,
- Depreciation per annum = ( Cost - Residual Value ) x Rate of depreciation
- So, from item 3...
- Depreciation per annum = (£250k - 5% of Cost ) x 20 % pa
- = (£250k - 5% of £250k ) x 20 % pa
- = (£250k - £12.5 ) x 20 % pa
- = (£237.5k ) x 20 %
- = £47.5k pa which is charged to Cost of Sales or COGS.
- The correct COGS Formula is..
- OPENING INVENTORY + INVENTORY PURCHASES - END INVENTORY = COGS
- More Expanded, from what I can see, INVENTORY PURCHASES should also have PURCHASE DISCOUNTS factored in, as we get deals on buying in bulk and so forth and, it's in the balance sheet and is quoted on the chart of accounts under Cost of Goods Sold, 5950, Purchase Discounts, thus...
- OPENING INVENTORY + (INVENTORY PURCHASES - PURCHASE DISCOUNTS) - END INVENTORY = COGS
- More Expanded, from what I can see, INVENTORY PURCHASES should also have RETURNS OUT removed, because sometimes we buy too much and return it, and is quoted on the chart of accounts under Cost of Goods Sold, 5900, Purchase Returns and Allowances, thus...
- OPENING INVENTORY + (INVENTORY PURCHASES - PURCHASE DISCOUNTS - RETURNS OUT) - END INVENTORY = COGS
- More Expanded, from what I can see, END INVENTORY must have the consideration for the breakages, and is quoted on the chart of accounts under Cost of Goods Sold, 5850 Inventory Adjustments thus...
- OPENING INVENTORY + (INVENTORY PURCHASES - PURCHASE DISCOUNTS - RETURNS OUT) - (END INVENTORY - INVENTORY ADJUSTMENTS) = COGS
- Where INVENTORY ADJUSTMENTS amounts to £4,300 - (£2,000 - £500) = £2,800
- More Expanded, including IMHO _ludicrous_ addition of machinery depreciation to COGS, that's
- OPENING INVENTORY + MACHINERY DEPRECIATION + (INVENTORY PURCHASES - PURCHASE DISCOUNTS - RETURNS OUT) - (END INVENTORY - INVENTORY ADJUSTMENTS) = COGS
- From the Balance sheet given, we have the following numbers...
- Item Found where?
- ---------------------------------------------------------------------------------------------
- OPENING INVENTORY = "Inventory (as at 1 October 2012)" = 42.7
- MACHINERY DEPRECIATION = "Item 3..." See above = 47.5
- INVENTORY PURCHASES = "Purchases" = 625.4
- PURCHASE DISCOUNTS = "Discounts received" = 15.8
- PURCHASE RETURNS AND ALLOWANCES = "Returns Out" = 9.5
- END INVENTORY = "Item 7..." = 67.6
- INVENTORY ADJUSTMENTS = "Item 7..." = 2.8
- So, slotting in the numbers...
- OPENING INVENTORY + MACHINERY DEPRECIATION + (INVENTORY PURCHASES - PURCHASE DISCOUNTS - RETURNS OUT) - (END INVENTORY - INVENTORY ADJUSTMENTS) = COGS
- 42.7 + 47.5 + ( 625.4 - 15.8 - 9.5 ) - ( 67.6 - 2.8 ) = COGS
- 42.7 + 47.5 + ( 600.1 ) - ( 64.8 ) = COGS
- = 625.5
- However, he gets 641.3 which you get by ignoring the PURCHASE DISCOUNTS, so it's worth asking him whether he's messed up, or, PURCHASE DISCOUNTS are not considered a COGS element. I say they are because it appears on the Tree of Accounts under code 5950, "Purchase Discounts" which is in the COGS section.
- His calculation would be this..
- OPENING INVENTORY + MACHINERY DEPRECIATION + (INVENTORY PURCHASES - RETURNS OUT) - (END INVENTORY - INVENTORY ADJUSTMENTS) = COGS
- 42.7 + 47.5 + ( 625.4 - 9.5 ) - ( 64.8 ) = COGS
- = 641.3
- Which is on his spreadsheet.
- I hope this helps!! I'm off to make some food - I'm starving!!
- Love,
- Morgan ¯\(ツ)/¯
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