Question

Blessings Limited uses material called zola which is measured in kilogram for its production. In the month of January, 2014, the following transactions in respect of the material occurred:

Jan.1 Opening inventory of 100 kg at GHS2 per kg

Jan.2 Purchases 200kg@ GHS4/kg

Jan.9 Issued 200kg @ GHS20/Kg

Jan.15 Purchased 400kg @ GHS3/kg

Jan.19 Purchased 300kg @ GHS5/kg

Jan 20 sale agents paid commission of GHS1.50 on each kg sold to date

Jan.22 Issued 600kg @ GHS30 each

Jan 31 returned to stores half of goods issued on Jan 9

Jan 31 any outstanding sales agents paid in full whereas rent and rates of GHS 2,000 is accrued.

Required:

i) Prepare a store ledger account using Weighted Average Method (WAM) to account for the month of January, 2020.

ii) Prepare the income statement of the company and show the profit for the month of January

iii) Explain two (2) advantages and disadvantages each of WAM in accounting for materials

  

Answer 1

Answer (i)

Blessings Limited
Store Ledger Account
		Receipts	Issues	Closing Inventoy
	Explanation	Units (kg)	Cost (GHS)	Total Cost (GHS)	Units issued (kg)	Cost (GHS)	Cost of goods issued (GHS)	Units (kg)	Cost (GHS)	Total Cost (GHS)
Jan-01	Balance	-	-	-	-	-	-	100	2	200
Jan-02	Purchases	200	4	800	-	-	-	300	3.33	1,000
Jan-09	Issued	-	-	-	200	3.33	666	100	3.33	333
Jan-15	Purchases	400	3	1,200	-	-	-	500	3.07	1,533
Jan-19	Purchases	300	5	1,500	-	-	-	800	3.79	3,033
Jan-22	Issued	-	-	-	600	3.79	2,274	200	3.79	758
Jan-31	Returned to store	100	3.33	333	-	-	-	100	4.25	425
							2,940

Answer (ii)

Blessing Limited
Income Statement
	GHS	GHS
Sales (200 kg x GHS 20 + 600 kg x GHS 30)		22,000
Less: Sales Returns (100 kg x GHS 20)		2,000
Net Sales		20,000
Less: Cost of goods sold		2,940
Gross Profit		17,060
Less: Expenses
Sales Commission            (200 kg x GHS 1.50)	300
Rent and Rates	2,000
Total Expenses		2,300
Net Profit		14,760

Answer (iii)

Two advantages of weighted average method in accounting for materials:

1. It involves the use of involves the consistent product cost. After the accountant calculates the merchandise cost, he uses that cost for all units. This includes the value used for the ending inventory value as well as the cost of goods sold.

2. It minimise the effect of unusual high and-low material prices. Since the weighted average method values the inventory at average price, it helps in minimizing of impact of inflation or deflation.

Two disadvantages of weighted average method in accounting for materials:

1. Materials used may not be charged to production at the current price.

2. If the receipts are numerous, many calculations are required.