Question

Using the following information calculate the amount of ending finished goods inventory:

Manufacturing costs	$1,000,000
Shoes manufactured	100,000
Beginning inventory	0 pairs
Pairs of shoes sold during the year	99,500
Selling price per pair of shoes	$18

Select one:

a. $8,000

b. $5,000

c. $99,500

d. $0

e. $500

Answer 1

Correct answer is (b): $5,000.

Explanation: The total pair of shoes manufactured = 100,000 pairs. It is given that the beginning inventory of shoes was 0 pairs. It is given that total 99,500 pairs of shoes has been sold during the year. Therefore, the closing inventory of shoes can be calculated as below:

Closing Inventory of shoes:

= Opening inventory of shoes + Pairs of shoes manufactured during the year - Pairs of shoes sold during the year

= 0 pair + 100,000 pairs - 99,500 pairs

= 100,000 pairs - 99,500 pairs

= 500 pairs.

Therefore, the closing inventory of shoes is 500 pairs of shoes.

Now, the cost of manufacturing 100,000 pairs of shoes is $1,000,000. Therefore, the manufacturing cost of 1 pair of shoes is:

= Total Manufacturing costs / Total pairs of shoes manufactured during the year

= $1,000,000 / 100,000 pairs

= $10 per pair of shoes.

Therefore, the manufacturing cost of 1 pair of shoes is $10.

The selling price per pair of shoes is $18. Therefore, the Net Realizable Value (NRV) per pair of shoes is $18.

As per IAS 2 Inventories, the finished goods should be valued at Cost or Net Realizable Value (NRV), whichever is lower. In the present case, the cost per pair of shoes is $10 whereas the net realizable value per pair of shoes is $18, hence cost is lower between the two.

Therefore, the closing inventory should be valued at cost.

The closing inventory is 500 pairs of shoes.

The value of closing inventory can be calculated as follows:

Closing Inventory * Cost per pair of shoes

= 500 pairs * $10 per pair

= $5,000.

Therefore, the value of closing inventory is $5,000.

Option (a) is incorrect because the value of inventory as per calculations mentioned above is $5,000 and not $8,000.

Option (c) is incorrect because it is given in the question that 99,500 pairs of shoes have been sold during the year and the value of closing inventory is not $99,500 as per calculations mentioned above.

Option (d) is incorrect because the value of inventory is not $0 as per calculations mentioned above.

Option (e) is incorrect as there are 500 pairs of shoes in the closing inventory but it's value is not $500 as per calculations mentioned above.