Page 42 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 2: Price Level Accounting

Notes
Opening Stock of raw materials on 1.1.2008
(100 tonnes @ ` 20 per tonne) ` 2,000
Purchases during 2008 Nil
Materials consumed during 2008 80 tones
Price of raw materials on Jan. 1, 2008 ` 25 per tonne
Average price during 2008 ` 30 per tonne
Price of raw materials on Dec. 31, 2008 ` 35 per tonne

Solution:
Historical Cost Accounting System (`)
Cost of sales (80 tonnes x ` 20) 1,600
Closing stock (20 tonnes x ` 20) 400
Current cost accounting system
Cost of sales (80 tonnes x ` 30) 2,400
Closing stock (20 tonnes x ` 35) 700

The increase in stock of `300 in CCA method over historical cost basis will be credited to
Current Cost Accounting Reserve. The closing stock in the balance sheet will be shown at `700.
The cost of Sales Adjustment amounting to `800 (i.e. `2,400 – `1,600) will be charged to Profit and
Loss Account and credited to Current Cost Accounting Reserve.

Monetary Working Capital Adjustment

The cost of sales adjustment only takes into account the impact of inflation on stock consumption.
Apart from it, an organisation requires additional resources to meet working capital requirements
due to the increase in prices. This extra amount of required working capital is known as additional
monetary working capital.
The additional net monetary working capital required is purely on account of increase in price levels
and not on account of increase in scale of operations. Monetary working capital normally means
aggregate of trade receivables, pre-payments and trade bills receivables less trade creditors, and
trade bills payables and accruals. An adjustment has to be made in respect of monetary working
capital while determining current cost operating profit. This adjustment should present the amount
of additional (reduced in case of deflation) finance needed for monetary working capital as a result
of changes in the input prices of goods and services used and financed by the business.

Example: From the following information, as per historical cost accounting method,
compute the monetary working capital adjustment under current cost accounting method:

Jan. 1, 2008 Dec. 31, 2008
Accounts receivable 2,000 3,600
Accounts payable 1,100 1,840
Monetary working capital 900 1,760
Price Index for materials 200 230
Price index for finished goods 150 180
Solution:
In order to determine Monetary Working Capital Adjustment, it will be necessary first to find
out the amount of increase in monetary working capital on account of increase in volume of

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