07 Inventory Problems 2021 (3)

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University of Alberta *

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Apr 3, 2024

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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 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. Compute Redco’s operating income for 2021 assuming (a) finished goods inventory is valued using only direct (variable costs) and (b) Redco’s inventory is valued using absorption costing. 2. Assume all the same per unit variable costs and the same total fixed costs as we used in Part 1. Redco’s CEO, who is interested in maximizing his bonus, is interested in what profit would look like under both alternatives above if the company increases the annual production to 100,000. 3

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

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