FINANCIAL MANAGEMENT AND CONTROL

Financial Management and Control



Financial Management and Control

Question 1

Gross Profit and Closing Stock Valuations

FIFO

LIFO

Average Costing

 

Units

Cost per Unit

Total Cost

Units

Cost per Unit

Total Cost

Units

Cost per Unit

Total Cost

1st Jan

200

4

800

200

4

800

200

4

800

1st Feb

250

5

1250

250

5

1250

250

5

1250

1st May

225

6

1350

225

6

1350

225

6

1350

1stMarch

250

3.5

875

250

3.5

875

250

3.5

875

1st April

175

4

700

175

4

700

175

4

700

1st June

200

5.5

1100

200

5.5

1100

200

5.5

1100

1st July

-200

4

800

-200

5.5

1100

-700

4.67

3266.67

 

-250

5

1250

-175

4

700

 

 

-225

6

1350

-250

3.5

875

 

 

 

 

-25

3.5

87.5

-75

6

450

 

 

TOTAL

600

 

3487.5

600

 

3125

600

 

3266.67

FIFO

LIFO

AVCO

Sales

 

5600

 

 

5600

 

 

5600

Less: Cost of Sales

 

 

 

 

 

 

Purchases

6075

 

6075

 

6075

 

Less: Closing Stock

-2587.5

-3487.5

 

-2950

-3125

 

-2808.33

-3266.67

Gross Profit

 

2112.5

 

 

2475

 

 

2333.33

Discussion of three methods

LIFO

Last in first out is the method for inventory costing. This works on a principle that stock units which are purchased by the business recently will be sold by business next time. The method assumes that most recent cost is the best to get in sync with the matching principle of accounting. Revenues and costs should be of the same period. At times of rising prices the companies usually understate their profits by using LIFO because it results in tax benefits as profits are overstated and lower tax is charged (Toomey, 2000, p. 67).

FIFO

First in First out is the method for material costing. The assumption of FIFO states that stock units' should be given the actual price which is ascertained at the time of stock purchase. In FIFO material which is purchased previously will be sold next time by the business with the same old price. Companies some times in order to make the balance sheets attractive use FIFO at times of inflation due to which the Cost of Goods sold is undervalued as a result the profits are overvalued and this makes balance sheet attractive for the investors. The cost is calculated easily because it is related to the goods purchased recently (Muller, 2011, p. 18).

Average Cost

Average cost method assumes that all of the stocks posses same physical characteristics but are not labelled with price tags. Similarly company uses average cost method in order to ensure smoothness in the profits of the company in the time of high low profits. The fluctuations are evened pout due to which issue costs do not vary over the period (Blocher, 2005, p.143). The price determined at the time of closing is the nearest price to the market levels. Receipt tracking is avoided because average costs are used in order to determine the costs (Muller, 2011, p. 18).

Question 2

Least Square Method

x

y

xy

x2

15

1000

15000

225

20

1400

28000

400

25

1000

25000

625

30

1200

36000

900

25

1400

35000

625

20

1800

36000

400

15

1500

22500

225

20

1600

32000

400

15

1000

15000

225

15

1200

18000

225

?x = 200

?y = 13100

? xy = 262500

?x2 = 4250

The equation of the line of Best fit is y = 2x + 1270 however the R2 is slightly greater than 0 which means that line cannot be used for future projections and it does fits in the data well. The future prediction of the outcomes through this model will not be effective. The activity hours are not purely responsible for generating operational costs in other operational costs are not dependent on the activity hours.

Values of a and b

a= £ 1309.4 are the fixed costs associated with operations

b= £ 0.028 are the variable costs per unit associated with the operations of the company.

Critical Evaluation of Least Square Method

Least Square Method is mathematical techniques which is used to evaluate the cost behaviour and helps in decision making. This technique analyses the cost behaviours over the period ...