A business uses the perpetual weighted average cost method, recalculating the average after each purchase. It holds 100 units at £10 and buys 100 units at £12. It then issues 150 units, buys 150 units at £13 and issues 100 units. What is the value of the closing 100 units?
Answer and explanation
Correct answer: B. £1,250
- Step 1: After the second purchase: 200 units cost £1,000 + £1,200 = £2,200, an average of £11. Issue 150 units at £11 = £1,650, leaving 50 units worth £550.
- Step 2: After the third purchase: 200 units cost £550 + £1,950 = £2,500, a new average of £12.50.
- Step 3: Issue 100 units at £12.50 = £1,250, leaving 100 units worth £1,250.
Answer
£1,250.
Why not the others: £1,300: This is the FIFO result, which values the closing units at the latest purchase price. £1,186: This uses a single average for the whole period instead of recalculating after each purchase. £1,150: This is the LIFO result, which values part of the closing units at the oldest prices; LIFO is not permitted by IAS 2.
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