ABFA 1023 FUNDAMENTALS OF ACCOUNTING

COURSEWORK 1 (RESEARCH ASSIGNMENT)

9 Oct 2010

SAMPLE 2
3.

Illustrations

We would like to illustrate our understanding of the topic researched by giving examples of
its application in a real business.

We have chosen the business of manufacturing chocolates. An example of a real business is

The Hershey Company, which has the largest chocolate factory in the world. There are four
types of inventories in a chocolate manufacturing business:
a)

Raw materials these are components that are purchased from suppliers, such as
cocoa beans, sugar, milk, various types of nuts and raisins;

b)

Work-in-progress these are the partly-completed products in the various stages of

manufacturing process, such as roasted cocoa beans, crushed cocoa beans, cocoa
paste and chocolate crumbs;

c)

Finished goods these are the final chocolate products, such as Kit Kat, Kisses,
chocolate bars and chocolate candies;

d)

Consumable stores these are materials required to keep the factory running in top
condition, such as lubricant, cleaning material and spare parts.

The FIFO (first in, first out) method of assigning cost of inventories is adopted, to reflect
the nature of these inventories, because the freshest ingredients will make the best-tasting
chocolates. Therefore, the first items received must be used up as quickly as possible in the
manufacturing process.

All inventories received and issued are recorded daily into the computer system, based on
the perpetual inventory valuation basis, so that accurate and up-to-date information about
quantities and costs are available at the press of a button, any time. However, physical
inventory count will still be conducted once a year, as a confirmation that the perpetual
records are indeed accurate.

ABFA 1023 FUNDAMENTALS OF ACCOUNTING

COURSEWORK 1 (RESEARCH ASSIGNMENT)

9 Oct 2010

SAMPLE 2
At the end of every month, when preparing the financial statements, the value of closing
inventories are measured at the lower of cost and net realisable value. The costs of closing
inventories are taken from the computer system (which has automatically calculated based
on the FIFO method), a complete listing for every type of inventory item.

Net realisable value of closing inventories are calculated by taking the estimated market
selling prices of every type of inventory item, less the estimated costs to be incurred in
getting these inventories ready for sale.

One by one, for each type of inventory item, a comparison is required to be made between
the cost and net realisable value. The lower value must be selected for each inventory item,
and all these lower values are then added up to determine the total value of closing
inventories.

A Memo is written by the Finance Manager, to give instructions to the Accounts Clerk to
record the value of closing inventories into the General Journal and post to the General
Ledger. This closing inventories value will appear in the Statement of Comprehensive
Income (as a deduction under Cost of Goods Sold) and the Statement of Financial
Position (under Current Assets).

References:

1)

Malaysian Accounting Standards Board. 2010. Financial Reporting Standard 102 Inventories. Viewed on 9
October 2010. Available from: <http://www.masb.org.my/images/stories/FRS102_9Aug2010.pdf>.

2)

Sangster, A. and Wood F. (11th. ed.). 2008. Business Accounting 1. Harlow: Prentice Hall.

3)

The Hershey Company. 2010. Making chocolate. Viewed on 9 October 2010. Available from:
<http://www.hersheys.com/discover/tour_printv.htm>.