Calculation of Historical Cost of Inventories using Adjusted Selling Price Method

Adjusted Selling Price Method is one of the inventory valuation methods used to calculate the historical cost of inventories. In this method, the cost of inventories is calculated by adjusting the selling price of inventories by deducting a percentage of gross profit margin from it.

Given information:

- Sales during the year: 200,000
- Cost of purchases: 200,000
- Opening inventory: NIL
- Closing inventory at selling price: 50,000

To calculate the historical cost of inventories using adjusted selling price method, we need to follow the below-mentioned steps:

Step 1: Calculate the Gross Profit Margin

Gross Profit Margin is the percentage of profit earned on sales after deducting the cost of goods sold. It is calculated as:

Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales x 100

In this case, we have sales of 200,000 and cost of purchases of 200,000. Therefore,

Gross Profit Margin = (200,000 - 200,000) / 200,000 x 100 = 0%

Step 2: Calculate the Adjusted Selling Price

Adjusted Selling Price is the selling price of inventories after deducting a percentage of gross profit margin from it. It is calculated as:

Adjusted Selling Price = Selling Price - (Gross Profit Margin / 100 x Selling Price)

In this case, the closing inventory is valued at selling price of 50,000. Therefore,

Adjusted Selling Price = 50,000 - (0 / 100 x 50,000) = 50,000

Step 3: Calculate the Historical Cost of Inventories

Historical Cost of Inventories is the cost of inventories at the time they were acquired. It is calculated as:

Historical Cost of Inventories = Cost of Purchases + Opening Inventory - Closing Inventory at Adjusted Selling Price

In this case, the opening inventory is NIL. Therefore,

Historical Cost of Inventories = 200,000 + 0 - 50,000 = 150,000

Therefore, the Historical Cost of Inventories using Adjusted Selling Price Method is 150,000.

Sales during the year. 200,000
add:- closing inventory at selling price 50,000
therefore, Estimated selling price = 2,50,000
less: cost of purchase (200,000)
hence, Estimated Gross profit :- Rs.50,000
Now,
gross profit margin = (50,000/250,000)×100%
=20%
Hence, Valuation of closing stock at cost
= Closing stock at selling price - Gross profit margin
=50,000-20%of 50,000
=50,000-10,000
=Rs.40,000