Grade 11 Accounting: Inventory System [Periodic System & Cost of Sales Calculations]

Summary

This educational video discusses inventory systems, focusing on the periodic versus perpetual inventory methods. It guides viewers through calculating the cost of sales for a school uniform shop using a periodic system, taking into account purchases, returns, and damaged goods. The video also covers how to determine the markup on sales, revealing a 75% markup due to the shop's monopoly-like position, which is critiqued for potentially burdening customers with high uniform costs while benefiting the owner.

Takeaways

• 📚 The video discusses inventory systems, specifically the calculation of cost of sales and markup in a business context.
• 🔍 Two inventory systems are mentioned: Perpetual and Periodic, with the latter being used by the business owner in the example.
• 💡 The Perpetual inventory system is deemed expensive and time-consuming, which is why the business owner chose not to use it.
• 🛒 The cost of sales is calculated manually under the Periodic inventory system using a specific formula involving opening stock, purchases, and closing stock.
• 📈 The script provides a detailed example of calculating the cost of sales for a business selling school uniforms, including various adjustments.
• 📝 The calculation of cost of sales involves adding net purchases and carriage on purchases, then subtracting closing stock and other relevant deductions.
• 🔢 The video script includes specific numerical values for the business's opening and closing stock, purchases, and additional costs like carriage on purchases.
• 📉 The business had to account for damaged goods returned to the supplier and stock donated to a child home, both of which affected the cost of sales calculation.
• 💰 The script explains how to calculate the markup on the school uniforms sold by applying a formula involving gross profit and cost of sales.
• 🤔 The video ends with a discussion on the implications of a 75% markup, suggesting it might be high due to the business's monopoly-like position.
• 📢 The presenter encourages viewers to subscribe for more educational content, indicating the channel covers a range of educational levels from grade 10 to university.

Q & A

What are the two main types of inventory systems discussed in the video?

The two main types of inventory systems discussed are the Perpetual Inventory System and the Periodic Inventory System.

Why might S. Sitole choose not to use the Perpetual Inventory System?

S. Sitole might choose not to use the Perpetual Inventory System because it is expensive to implement, requiring the purchase of a computer and software, and it is time-consuming due to the need to constantly update the system with each sale.

What is the formula used to calculate the cost of sales under a periodic inventory system?

The formula to calculate the cost of sales under a periodic inventory system is: Opening stock + Net purchases + Carriage on purchases - Closing stock.

What additional cost is considered in the calculation of purchases in the video?

The additional cost considered in the calculation of purchases is the Carriage on purchases, which is the transport cost for the goods.

How many delivery orders were made during the year according to the video?

According to the video, 19 separate delivery orders were made during the year.

What was the cost of carriage per delivery for the school uniforms?

The cost of carriage per delivery for the school uniforms was 500 Rand.

What is the formula to calculate the markup on the school uniforms?

The formula to calculate the markup is: (Gross profit / Cost of sales) * 100.

What is the sales amount given in the video for the year ended 28 February?

The sales amount given in the video for the year ended 28 February is 742,000 Rand.

What is the calculated markup percentage for S. Sitole's school uniforms?

The calculated markup percentage for S. Sitole's school uniforms is 75%.

What are some reasons the presenter gives for the high markup on the school uniforms?

Some reasons given for the high markup include the fact that the uniform is a necessity for students, there is no competition as it's the only shop selling uniforms in the area, and the seller is taking advantage of the lack of choice for the customers.

What is the presenter's opinion on the high markup percentage?

The presenter believes that while the high markup is good for the owner's profit, it is not beneficial for the customers, especially considering that uniforms are a necessity for learners.

Outlines

00:00

📚 Introduction to Inventory Systems and Question Analysis

The video script begins with an introduction to the topic of inventory systems, specifically focusing on the calculation of cost of sales. The presenter mentions previous content on ledger accounts and introduces the distinction between Perpetual and Periodic inventory systems. The script proceeds to address a question from a 2019 exam paper about S Sitole's business, which sells school uniforms. The task is to calculate the cost of sales using a Periodic inventory system, and the presenter outlines the methods and formulas required for this calculation.

05:02

🔢 Detailed Calculation of Cost of Sales Using Periodic Inventory System

This paragraph delves into the specifics of calculating the cost of sales for S Sitole's business using the Periodic inventory system. The presenter explains the formula involving opening stock, net purchases, carriage on purchase, and closing stock. Additional information provided includes the cost of damaged goods returned to suppliers, stock donated to a child home, and the calculation of closing stock based on the number of items on hand at year-end. The paragraph concludes with the calculation of net purchases after considering all additions and deductions.

10:02

📈 Calculating Markup and Analyzing Its Implications

The third paragraph discusses the calculation of markup applied to the school uniforms sold by S Sitole's business. The presenter explains the formula for markup, which involves gross profit, cost of sales, and sales amount. The script provides a step-by-step breakdown of how to calculate the gross profit and then the markup percentage. The presenter also asks for the viewer's opinion on the markup, suggesting that a 75% markup might be considered high, especially considering the business operates as a monopoly in its market.

15:03

🤔 Ethical Considerations and Conclusion on Markup Strategy

The final paragraph raises ethical questions about the high markup and its impact on customers. The presenter suggests that the markup is high because the business has no competitors, forcing parents to purchase uniforms at the set price. The presenter also discusses the advantages and disadvantages of such a markup for both the business owner and the customers. The video concludes with a reminder for viewers to subscribe for more educational content and an invitation for feedback and questions.

Keywords

💡Inventory System

An inventory system is a method used by businesses to track and manage their stock levels. In the video, it is the central theme as the presenter discusses how to calculate the cost of sales using this system. The script mentions two types of inventory systems: Perpetual and Periodic, which are crucial for understanding the business's stock management and cost accounting.

💡Perpetual Inventory System

A Perpetual Inventory System is a method where stock levels are updated in real-time as transactions occur. The video script explains that it is expensive and time-consuming, which is why the business in the example, run by S Sitole, has chosen not to use it. The script uses this term to contrast with the Periodic Inventory System that Sitole has implemented.

💡Periodic Inventory System

In contrast to the Perpetual system, a Periodic Inventory System involves calculating stock levels at specific intervals, usually at the end of an accounting period. The script emphasizes that under this system, the cost of sales must be manually calculated, which is a key point in the video's tutorial on inventory management.

💡Cost of Sales

Cost of Sales refers to the direct costs attributable to the production of the goods sold by a company. In the script, the presenter guides viewers on how to calculate this figure using the Periodic Inventory System. It is a fundamental concept in the video, as it is essential for determining the gross profit and understanding the business's financial health.

💡Markup

Markup is the difference between the cost of an item and its selling price, usually expressed as a percentage of the cost price. The video discusses how to calculate the markup on school uniforms sold by the business. The script uses the term to illustrate the profit margin and to analyze the business's pricing strategy.

💡Gross Profit

Gross Profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. In the script, it is calculated by subtracting the Cost of Sales from the total sales amount, which helps in determining the Markup percentage.

💡Carriage on Purchase

Carriage on Purchase refers to the transportation costs associated with purchasing goods. In the video, the script explains that these costs are included in the total purchase cost, with an example of 500 per delivery multiplied by 19 deliveries, which is a part of the Cost of Sales calculation.

💡Closing Stock

Closing Stock represents the inventory that a business has on hand at the end of an accounting period. The script mentions calculating the cost of the closing stock by multiplying the number of items (275) by their average cost (90), which is then subtracted from the total to find the Cost of Sales.

💡Opening Balance

The Opening Balance is the starting point of an accounting period, representing the stock level at the beginning of the period. In the script, it is used to establish the initial stock value for the Cost of Sales calculation, with an example of 34,000 for the school uniforms.

💡Creditors

Creditors are individuals or entities to whom money is owed. In the context of the video, the script refers to the amount paid to creditors for the goods purchased on credit, which is part of the net purchase calculation for the Cost of Sales.

💡Monopoly

A Monopoly is a situation where a single company or entity has exclusive control over a market, with no competitors. The script uses the term to describe the business's market position, as it is the only seller of school uniforms in the area, which allows it to set high markups.

Highlights

Introduction to inventory system and its importance in accounting for cost of sales and markup calculations.

Explanation of two inventory systems: Perpetual and Periodic inventory systems.

Difference between Perpetual and Periodic inventory systems in terms of cost and time consumption.

Reasons for choosing the Periodic inventory system over the Perpetual system due to cost and time efficiency.

Step-by-step guide to calculate the cost of sales using the Periodic inventory system.

Formula for calculating cost of sales under the Periodic inventory system including opening stock, purchases, and carriage on purchase.

Details on how to account for damaged goods returned to suppliers in the inventory calculations.

Process of calculating the net purchases by considering creditors and returns.

Explanation of how to determine the closing stock by averaging the items on hand.

Final calculation of the cost of sales by combining all factors including net purchases and closing stock.

Introduction to the concept of markup in the context of inventory management.

Formula for calculating the markup percentage based on gross profit and cost of sales.

Analysis of a 75% markup on school uniforms and its implications for both the business owner and customers.

Opinion on the markup being high due to the lack of competition and the necessity of uniforms for students.

Discussion on the ethical considerations of high markups in a monopoly-like situation.

Conclusion on the balance between high profit for the owner and the potential burden on customers.

Encouragement for viewers to subscribe for educational content ranging from grade 10 to university level.

Transcripts

okay guys so in today's video we are

going to do some questions that are

related to inventory system so remember

on the previous video where we were

treating a ledger account a purchase

account as well as a trading account

however this is not the only style that

you have to expect when you write your

test or examination under inventory

system you also have to make sure that

you are able to answer some questions

you are able to calculate a markup we

are able to calculate a cost of sales as

well so this is what we are going to do

today without wasting any further time

let's read our question it was question

one from the question paper that was

written in 2019 okay inventory system

the information provided below relate to

business run by S sitole this business

is only shop that sells a school uniform

in each local area okay then

required 1.1 they said acetole has

chosen to implement the inventory system

to calculate this business cost of sales

remember we have two different method on

how we can record our inventory system

you must be able to know the difference

between Perpetual inventory system and

periodic inventory system as we

discussed on the previous video okay so

I'm going to give you further detail if

you even watched part one okay number

one they said

name the other stock system that can be

used remember sitole is using a periodic

inventory system now on question 1.1.1

they want us to identify other methods

than periodic invador system which is

Perpetual inventory system that the

answer for

1.1 okay

1.1.1

Perpetual inventory system okay then

question 1.1.2 discuss a reason why is

it all decided not to use

this method why is Italy decided not to

use Perpetual inventory system reason

number one

this method guys is very expensive

it's very expensive because remember you

have to buy a computer install some

software so that those software will be

able to calculate a cost of sales on

each point of sales so he chose he

didn't desire to choose this method

because it's very expensive number one

number two

the other reason might be this method

is time

consuming

if you are using this inventory system

guys we have to go into a system and

update each and every single item that

we are selling so that the system will

know that the cost of sales of this item

is so much so it's gonna take a lot of

time so that's why he decided not to

choose this method okay then let's

proceed 1.2

calculate the cost of sales for the year

ended 28 February using a periodic

inventory system remember if you are

using a Perpetual inventor system

a system calculates a cost of sales for

us but under a periodic inventory system

we have to calculate it manually using a

a formula okay

so this is what we are going to do for

12 marks we are going to calculate a

cost of sales

all right so before we start with this

calculation guys the first step is to

know the formula that we are going to

use okay when you calculate a cost of

sales under periodic invador system you

have to say

open in balance

of stock

okay you can say open in stock

plus purchase

a purchases remember you have to use a

net purchase which means that if there

is a further detail we are going to add

some we are going to subtract because we

are looking for net balance that you

calculated for example if you use t

account we are looking for the net

balance after you have subtracted all

those donations and all those other

written amount okay

then we have a carriage

on purchase

okay then after that you less

a closing

stock

okay then it's gonna give you

a caused

of sales a courage on purchase is simple

and the same way as

a transport cost is the same okay let's

check our

information information they said the

balances or the total in the general

ledger

they give us amount for 28 February 2017

which is our closing balance and they

give us the one much 2016 which is our

opening balance okay a stock of school

uniform a opening balance they give us

34

thousand

they give us 34 000 okay but closing

they didn't give us which means that we

have to complete

okay then number a additional

information school uniform are only item

bought on credit by this business okay

they are indicating that we have to be

aware of creators control

the suppliers charge 500 per delivery

okay 19 separate orders were made and

delivery during the course of the year

okay one delivery will pay 500 which

means that

under a carriage on purchase we have to

take 500 and we multiply by 19.

okay unless your conclusion here

500

Matlab by

19 okay if you do calculation let's

conclude you're gonna get amount of nine

thousand

five

hundred for Carriage on purchase okay

we're gonna come back on purchase now

all right

then they said a creditors were paid

amount of four hundred and twenty four

thousand five hundred and seventy

we open a brackets because we're still

going to face some additional

information okay it's gonna be 24 24

570

okay then they said four shares with the

cost price of 80 Rand each were damaged

and therefore return to supplier okay

this return has not been

recorded

they return

a faucet and the cost price was 80 Rand

which means that we have to say 4

multiply by 80.

okay if you say for my brother eight

it's gonna give you 300

Trend every time

we have to subtract guys we have to

subtract okay because we no longer

going to do it

to pay this uniform to our supplier

because we return to them okay and then

let's proceed

number e Old Stock valued a 12 000 were

donated to child home which means that

we are not going to sell this item

we we are going to do it

to subtract it under our purchase

remember when we open a t account for

purchase we record it on the credit side

which is going to reduce what we record

on the debit side of purchase okay we're

gonna say minus 12

000 simple as that okay

now again they said

after performing the year end stop

275 item of closing were on hand at

average of night run each so this is our

closing stock we have to say 275 by

night

so that we can get to travel 275

90 run per item and if you do that

calculation you're gonna get

a 24

7 50. remember a closing stock we said

you have to less you have to subtract

you have to indicate by a brackets okay

now

before we go to our closing amount which

is going to be cost of sales the last

one remember

if you check

on top

we have a creditors control amount on

the table okay we have the first the

first one of the current year this is

the one that will purchase

in the current year which means that

it's going to be part of purchase we are

going to edit as 96

thousand however the one that reflects

amount of last year which is 103 000. we

have to subtract it why that amount is

already been paid which means that it's

no longer from part of patience of

currency where to deduct that amount of

103

000.

okay let me just use here minus 103

thousand okay this bracket is bit longer

so you also have to learn how to prepare

a purchase account is also important

make sure that you go back and watch

part one so that you can learn how to

repair Apache account as well okay now

let's let's get the balance for

purchases

it's gonna be if you calculate all this

amount you add whatever that must be

added and you subtract you're gonna get

four

or five

250. simple it's our net purchase and

now we have to add everything and

subtract a closing balance okay if you

do that you're gonna get amount of four

24

000

simple as that guys simple as that so if

you have any question make sure that you

you comment I answer immediately when

you comment just tell me if you are

still struggling or you want some

understanding for for this part please

don't forget to subscribe guys let's uh

this channel grow more and more and also

like this video so that when I upload

any grade 11 video they are going to

send you a notification because you like

a video that is related to to grade 11

okay then now let's go to 1.3

amounted to

742 000.

now they said calculate a markup that is

applied to his school

uniform okay number

1.3.2 what's your opinion on the markup

okay they give us a sales amount and

remember we have a cost of sales so it

is important to get a course of sales

guys so that you can get the following

balances okay

now

when we calculate a markup we have to

use a formula

1.3.1 what's the formula for markup

you have to say a gross

profit

divided by

cost of sales in the modular by 100.

now because we have sales amount and you

also have causal sensor A Cause amount

you can get a gross profit by such a

threatenses to cost of sales Okay so

if you said amount of sales of 720 minus

424

000. you are going to get a gross profit

of 318

000 then you divide by a cost of sales

of four

24

000 and you multiply by

hundreds to get 318 guys you take seven

four two thousand of cells and you

subtract what

cost of sales amount then you will get

this one simple okay then our markup

will be

75 percent if you punch this on your

calculator it will be 75 percent then

the following question now is that what

is your opinion on this markup give a

reason for your answer

okay

what do you think about this markup okay

as you can see this markup is 75 percent

it's 75 over 100 reason number one

uh remember this question have how many

marks

three months

yes they have it remarks which means

that you have to lay down a three point

number one you have to say

the markup

is very high

okay and number two

remember this guy is selling

a uniform

a uniform is a must for you as a student

to weigh it when you go to to school and

remember they say that this is the only

person who is selling a uniform into his

uh place

so which means that at parents they

don't have a choice but to buy a uniform

because he is the only one who is

selling this uniform okay

it's like he's trading as a monopoly you

know what is the Monopoly right where

you don't have a what a competitor okay

which means that the customers

they don't have a choice

customers do not

I have a choice

they have to buy this uniform okay then

another one what we can say is that

acetology is taking advantage of course

because he is the only one who is

selling this uniform he is taking

advantage

because

there is no other place that the

customers will go and do it

and buy a uniform that's the reason

number number three okay what can we

conclude about this

it's depending on your choice

what you can say

the first one is that this is good for

for the owner right because the owner is

getting a higher profit it's good for

the owner but what about the buyer

is better remember not everyone who can

afford expensive uniform uniform is a

need for for for for Learners it's a

need so which means that

on the hand of the owner this is good

because he's making a good profit but on

the hand of the customers this is not

good

at all okay so that's it for for this

video guys so I hope you enjoy you learn

something thank you so much for visiting

my channel if you are here for the first

time we always upload videos from grade

10 up to University level make sure that

you subscribe so that at least when you

go to the next level you will be able to

learn

more videos like this

and like button like that thank you so

much guys see you next time

right now