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The costs of conversion of inventories include :
(a) Costs directly related to the units of production
(b) Systematic allocation of fixed and variable production overheads
(c) Systematic allocation Selling and distribution costs
(d) Both (a) and (b).
The cost of conversion includes the cost, directly related to production and various production overheads expenses which are fixed or variable. However, selling and distribution cost is not included in inventory value. Hence option (d) is correct.
2. In periods of inflation, the impact of change in the method of valuation of inventories from LIFO method to FIFO method will cause :
(a) Increase in profit and decrease in the cost of goods sold
(b) Decrease in profit and increase in the cost of goods old
(c) Increase in profit and decrease in the value of closing tock
(d) Decrease in profit and decrease in the value of closing stock.
In the periods of inflation, LIFO method results in lower profits (as the cost increases) and FIFO method leads to higher profits (as the cost is lower). So, the impact of change in the method of valuation of inventories form LIFO method to FIFO method will cause decrease in the cost of goods sold, and hence increase in Profit. Hence option (a) is correct.
3. In periods of inflation, the impact of change in the method of valuation of inventories from LIFO method to FIFO method will cause :
(a) Increase in the cost of goods sold
(b) Decrease in profit
(c) Increase in Inventory Value
(d) Decrease in Inventory Value
In the periods of inflation, FIFO method results in increase in Inventory Value and LIFO method leads to decrease in Inventory Value. So, change from LIFO to FIFO would increase in Inventory Value. Hence option (c) is correct.
4. Inventory should be valued at
(a) Historical Cost
(b) At market price
(c) At Net Realisable value
(d) At Historical Cost or Net Realisable value, whichever is lower
Inventories should be valued at lower of historical cost or net realizable value. Hence option (d) is correct.
5. Which of the following valuation methods shows higher profits during the period of rising prices?
(a) FIFO method
(b) LIFO method
(c) Weighted Average Method
(d) Simple Average Method
In the periods of inflation, FIFO method leads to higher profits (as cost of production is lower). Hence option (a) is correct.
6. During a period of steadily falling prices, which inventory valuation method cause highest gross profit.
(a) FIFO method
(b) LIFO method
(c) Average cost method
(d) None of the above.
In the periods of deflation (steadily falling prices), LIFO method leads to highest profits (as cost of production is lowest). Hence option (b) is correct.
7. What is FIFO method?
(a) Issued made out of latest receipt lying in stock
(b) Issued made out of earliest receipt lying in stock
(c) Issued made out of highest value lying in stock
(d) Issued made out of lowest value receipt lying in stock.
Under FIFO method the goods are issued out of the oldest stock in hand, i.e. issues should be valued as per price of the earliest stock in hand. Hence option (b) is correct.
8. In a period of inflation, which inventory method would be considered suitable by the accountant to compute current market cost
(a) LIFO method
(b) FIFO method
(c) Simple Average Method
(d) Weighted Average Method
In period of inflation, LIFO method gives the cost as per current market cost and reflects the cost of production as per current price. Other methods will result in inflated profit. Hence option (a) is correct.
9. ABC Analysis is a
(a) System of the financial planning
(b) Technique of profit planning
(c) Technique of inventory control
(d) Technique of sales planning.
ABC Analysis is a system of inventory control. It exercises discriminating control over different items of stores classified on the basis of value of inventory item. Hence option (c) is correct.
10. Net realizable value of inventory means
(a) Realisable Sales value less cost incurred for sales
(b) Sales less sales return
(c) Sales less cost of acquisition
(d) Sales less profit margin.
Net realizable value means the estimated selling price in ordinary course of business less estimated cost to make the sale. Hence option (a) is correct.
