Question

Lancashire Hotpot Ltd manufactured an item of inventory for a customer at a cost of £1,200, but the item was rejected as it did not meet the customer's specifications. The inventory item could be sold elsewhere in its present form for £800, or it could be re-worked at an additional cost of £300 and could then be sold for £1,300. The original selling price was £1,400.

REQUIRED:

Indicate the value at which should the inventory item should be included in the financial statements.

Give reasons for your answer.

Answer 1

Solution:-

Inventory should be included in the financial statements at the original cost (i.e 1200)

if rejected item sold at 800 then total loss of 400.

and after Re-work item will sold then total loss of 100.

In the conclusion company should hold the stock at original cost and after the re-work company will sell the item at their selling price. Company should try to reduce the loss as minimum.

Working Note:-

Incase of Rejected Item Sold

Manufacturing Cost = 1200

Rejected Item Selling Price = 800

Projected Loss = Selling Price - Manufacturing Cost

= 800 - 1200

= - 400

Incase Re-work on Rejected Itms and Sold

Re-Work Additional Cost = 300

Total Cost = Manufacturing Cost + Additional Cost

= 1200+300

= 1500

Loss of Re-work Item Sold = Selling Price - Total Cost

= 1400 - 1500

= - 100