Page 174 - Plant design and economics for chemical engineers

148 PLANT DESIGN AND ECONOMICS FOR CHEMICAL ENGINEERS

In transferring the cost of chemical A to the inventory and cost-of-sales
accounts, there is a question as to what price applies for chemical A. There are
three basic methods for handling problems of this type.

1. The current-average method. The average price of all the inventory on hand at
the time of delivery or use is employed in this method. In the preceding
example, the current-average price for chemical A would be $0.0380 per
pound.
2. Thefirst-in-first-out (or fife) method. This method assumes the oldest material
is always used first. The price for the 6000 lb of chemical A would be $0.0360
per pound for the first 5000 lb and $0.0390 for the remaining 1000 lb.
3. The lust-in first-out (or life) method. With this method, the most recent prices
are always used. The price for the 6000 lb of chemical A would be
transferred as $0.0390 per pound.

Any of these methods can be used. The current-average method presents
the best picture of the true cost during the given time interval, but it may be
misleading if used for predicting future costs.
The information presented in this chapter shows the general principles
and fundamentals of accounting which are of direct interest to the engineer.
However, the many aspects of accounting make it impossible to present a
complete coverage of all details and systems in one chapter or even in one
book.? The exact methods used in different businesses may vary widely depend-
ing on the purpose and the policies of the organization, but the basic principles
are the same in all cases.

PROBLEMS
1. Prepare a balance sheet applicable at the date when the X Corporation had the
following assets and equities:
Cash $2O,ooo Common stock sold $SO,ooo
Accounts payable: Machinery and equipment
B Company 2,000 (at present value) 18,000
C Corporation 8,000 Furniture and fixtures (at
Accounts receivable 6,000 present value) 5,000
Inventories 15,000 Government bonds 3,ooo
Mortgage payable 5,000 Surplus 2,000

tC. T. Horngren, “Introduction to Financial Accouqting,” 2nd ed., Prentice-Hall, Inc., Englewood
Cliffs, NJ, 1984; J. W. Wilkinson, “Accounting and lnformation Systems,” Wiley, New York, 1982.