Cost and Management Accounting

Part a

Shepherd Cycles sells a variety of bicycles. The business which uses the FIFO method, began

the last quarter of 2013 (October 1 to December 31) with 20 “Iron Man 2” bicycles at a total cost

of $122,000. During the quarter, the company completed the following transactions.

October 8

105 bicycles were purchased at a cost of $5,920 each but in addition there was

a freight charge of $480 on each bicycle.

October 31

The sales for October were 85 bicycles which yielded total sales revenue of

$761,600. ( 15 of these units were sold on account)

November 4

A new batch of 60 bicycles was purchased at a total cost of $408,000

November 10

5 of the bicycles purchased on November 4 were returned to the supplier, as

they were defective.

November 30

During the month 57 bicycles were sold at a price of $9,520 each.

December 4

A customer, to whom 9 bicycles were sold during the first business day of

November, returned 4 of the cycles.

December 10

Owing to an increased demand, a further 115 bicycles were purchased at a cost

of $7,600 each; these were subject to a trade discount of 5% each.

December 31

122 bicycles were sold during December at a unit selling price of $10,100.

December 31

An actual count of inventory was carried out which revealed that there were 28

units of the merchandise in the store room.

All purchases were on account and received on the dates stated.

Required:

i) Prepare a perpetual inventory record for this merchandise, to determine the

company’s cost of goods sold for the quarter and the value of ending. (20 marks)

ii) Given that selling & distribution and administrative costs for the quarter were $214,940

and $103,760 respectively, prepare an income statement for Shepherd Cycles for the

quarter ended December 31, 2013. (6 marks)

iii) Journalize the October transactions, assuming the company uses a:

- Periodic inventory system

- Perpetual inventory system (7 marks)

iv) The manager of Shepherd’s has stated that his objective is to cut back on his tax liability

and is of the view that the FIFO method is best. Do you agree with him? (3 marks)

Part b

Carpet Warehouse began the year with inventory of $350,000. During the year, the business

made net purchases of $1,600,000 and had net sales of $2,500,000. For the past several years,

Fuller’s gross profit has been 30% of sales. Use the gross profit method to estimate the cost of

the ending inventory for the monthly financial statements. (4 marks)