07 Inventory Problems 2021 (3)

Inventory Problems Problem 1 (for self study) Alberta Corp. has the following inventory transactions for the year ended December 31, 2021: Date Transaction Quantity Price or cost Jan. 1 Opening inventory 1,000 $12 Feb. 4 Purchase 2,000 18 Feb. 20 Sale 2,500 30 Apr. 2 Purchase 3,000 23 Nov. 4 Sale 2,000 33 Required: Compute ending inventory and cost of sales for 2021 assuming (a) FIFO and (b) weighted average inventory costing. Alberta Corp. uses a periodic inventory system. 1

Problem 2 (for discussion) Percival Michaels Beauty Products, Inc. (PMBP) carries inventory using a weighted average cost flow assumption. The cost of new inventory has been steadily decreasing throughout the year. Opening inventory, weighted average, was $100,000. Closing inventory, weighted average, was $95,000. Cost of goods sold, weighted average, was $1,150,000. FIFO opening inventory was $95,000, and FIFO closing inventory was $85,000. (a) Calculate cost of sales using the FIFO method of inventory valuation. (b) Calculate FIFO inventory turnover, defined as cost of goods sold/ ending inventory. (c) If managers at PMBP were evaluated on the basis of inventory turnover, defined as cost of goods sold/ending inventory, rather than on the basis of net income, would they prefer weighted average or FIFO costing? Why? 2

Problem 4 (for self-study) Duncan Corporation reports a physical count of closing inventory at year-end December 31, 2021 of $389,850. Duncan uses a periodic inventory system. 2021 sales, purchases, and cost of sales (prior to adjustment) are $3,500,000, $2,975,000, and $3,000,000 respectively. The following information comes to your attention: 1. $15,280 of merchandize purchased in December was not included in the physical count because it was unnoticed in a corner of the warehouse. The invoice has been received prior to year-end and recorded as a purchase. 2. The company made sales of merchandize in the amount of $20,000 on December 31, 2021 that was counted (and included in the $389,850 total) before it was shipped out. The merchandize had a cost of $15,500. 3. Included in the $389,850 was merchandize received prior to year-end with a cost of $11,500. The invoice was not received by year-end, and therefore the purchase was unrecorded. 4. The physical count included inventory of $9,500 held on consignment from Greene Inc. 5. The physical count did not include $4,750 inventory owned by Duncan that was stored at an alternate location. 6. Undamaged inventory with a cost of $1,750 was returned for credit and included in the count. The initial sale, in the amount of $2,250, has not been reversed. Duncan’s policy is to accept any undamaged goods returned for a full refund. Required: Compute corrected ending inventory, purchases, cost of sales, and sales for 2021. 4

Problem 5 (for discussion) The following table presents cost of sales and opening and closing inventory from the 2021 annual reports of the companies named below. Magna International’s a diversified automotive parts supplier, Canadian Tire is a retail store that focuses on home improvements, gardening and outdoor supplies, and some automotive parts and services. McDonald’s and Tim Horton’s are both fast-food suppliers. McDonald’s focus is more towards hamburgers and French fries, while Tim Horton’s focuses on coffee and donuts. Required: 1. Assume you have been asked for advice from a friend who knows you are studying business. He has recently heard about the concept of inventory turnover, and requests that you calculate inventory turnover for all of these companies, explain the concept to him, and rate the businesses on the basis of inventory turnover. How would you respond? 2021 financial results Cost of goods Opening Closing sold Inventory inventory (Millions of $) Magna International 31,123 2,804 2,564 Canadian Tire 7,898 1,710 1,765 Mcdonald's 4,897 59 100 Tim Horton's 527 117 118 The cost of sales figures are obtained as follows: Magna. Canadian Tire (Note 28) and Tim Horton’s each provide a line item “cost of sales”. McDonald’s figure includes food & paper. 5

Problem 3 (for self-study) Redco’s 2021 records reveal the following: Net Sales $1,400,000 Cost of goods manufactured Variable $ 630,000 Fixed $ 315,000 Total cost of goods manufactured $ 945,000 Operating expenses Variable $ 98,000 Fixed $ 147,000 Units manufactured 70,000 Units sold 60,000 Opening inventory of finished goods in units -0- Required: 1. Closing inventory in units: 0 + 70,000 - 60,000 10,000 Units manufactured: Variable cost per unit: $630,000/70,000 $9 Absorption cost per unit: ($630,000 + $315,000) /70,000 $13.50 Production of 70,000 units Variable Costing Absorption costing Sales $1,400,000 $1,400,000 Opening Inventory 0 0 Cost of Goods Manufactured - Variable 630,000 Cost of Goods Manufactured - Fixed 315,000 Total COGM 945,000 945,000 Less: Closing Inventory 90,000 135,000 Cost of Goods Sold 855,000 810,000 Gross Profit 545,000 590,000 Operating expenses Variable 98,000 98,000 Fixed 147,000 147,000 245,000 245,000 Operating Income 300,000 345,000 7

2. New production level 100,000 New ending inventory (0 + 100,000 - 60,000) 40,000 Fixed manufacturing costs $315,000 per unit (100,000 units) $3.15 Total costs per unit at 100,000 units $12.15 Production of 100,000 units Variable Costing Absorption costing Sales $1,400,000 $1,400,000 Opening Inventory 0 0 Cost of Goods Manufactured - Variable 900,000 Cost of Goods Manufactured - Fixed 315,000 Total COGM 1,215,000 1,215,000 Less: Closing Inventory 360,000 486,000 Cost of Goods Sold 855,000 729,000 Gross Profit 545,000 671,000 Operating expenses Variable 98,000 98,000 Fixed 147,000 147,000 245,000 245,000 Operating Income 300,000 426,000 Increased Income, Absorption costing 100,000 vs 70,000 $81,000 Fixed costs in inventory at production of 100,000 (40/100) X $315,000 $126,000 Fixed costs in inventory at production of 70,000 (10/70) X $315,000 $ 45,000 Difference $ 81,000 A manager interested in maximizing his bonus would choose to produce the additional units as this would increase the income for the period increasing his bonus. 8