Chapter 6, Problem 11BP

a.

To determine

Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015 using FIFO costing method - Perpetual inventory system.

Explanation of Solution

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

First-in-First-Out: In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Compute the value of cost of goods sold and ending inventory of product B as on December 31, 2015 using perpetual FIFO:

Date	Purchased			Sold			Balance
	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)
January 1							2,600	40	104,000
January 3				1,600	40	64,000	1,000	40	40,000
March 8	3,000	44	132,000				1,000	40	40,000
							3,000	44	132,000
June 13				1,000	40	40,000	2,000	44	88,000
				1,000	44	44,000
September 19	800	46	36,800				2,000	44	88,000
							800	46	36,800
November 23	1,200	48	57,600				2,000	44	88,000
							800	46	36,800
							1,200	48	57,600
December 28				1,800	44	79,200	200	44	8,800
							800	46	36,800
							1,200	48	57,600
						$227,200	3,200		$103,200

Table (1)

Conclusion

Therefore, the value of cost of goods sold is $227,200 and ending inventory is $103,200.

b.

To determine

Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015 using LIFO costing method - Perpetual inventory system.

Explanation of Solution

Last-in-Last-Out: In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

Compute the value of cost of goods sold and ending inventory of product B as on December 31, 2015 using perpetual LIFO:

Date	Purchased			Sold			Balance
	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)
January 1							2,600	40	104,000
January 3				1,600	40	64,000	1,000	40	40,000
March 8	3,000	44	132,000				1,000	40	40,000
							3,000	44	132,000
June 13				2,000	44	88,000	1,000	40	40,000
							1,000	44	44,000
September 19	800	46	36,800				1,000	40	40,000
							1,000	44	44,000
							800	46	36,800
November 23	1,200	48	57,600				1,000	40	40,000
							1,000	44	44,000
							800	46	36,800
							1,200	48	57,600
December 28				1,200	48	57,600,	1,000	40	40,000
				600	46	27,600	1,000	44	44,000
							200	46	9,200
						$237,200	2,200		$93,200

Table (2)

Conclusion

Therefore, the cost of goods sold is $237,200 and the value of ending inventory is $93,200.

c.

To determine

Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015 using weighted-average inventory costing method - Perpetual inventory system.

Explanation of Solution

Weighted-average cost method: In moving-average Cost Method, the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

Compute the value of cost of goods sold and ending inventory of product B as on December 31, 2015 using perpetual weighted average cost method.

Date	Purchased			Sold			Balance
	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)
January 1							2,600	40	104,000
January 3				1,600	40	64,000	1,000	40	40,000
March 8	3,000	44	132,000				3,000	44	132,000
							4,000	43	172,000
June 13				2,000	43	86,000	2,000	43	86,000
September 19	800	46	36,800				2,000	43	86,000
							800	46	36,800
							2,800	44	122,800
November 23	1,200	48	57,600				2,800	44	122,800
							1,200	48	57,600
							4,000	45.1	180,400
December 28				1,800	45.1	81,180	2,200	45.1	$99,220
						$231,180

Table (3)

Working Notes:

Compute the weighted average cost of inventory after March 8 purchase.

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on March 8 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on January 3 + }\\ \text{Total cost of units purchased on March 8}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on January 3+ }\\ \text{Number of units purchased on March 8}\end{array}\right)}\\ =\frac{\text{\$40,000+\$132,000}}{\text{1,000 units+3,000 units}}\\ =\frac{\text{\$172,000}}{\text{4,000 units}}\\ =\$43\end{array}$

Compute the weighted average cost of inventory after September 19 purchase.

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on September 19 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units after June 13 sales + }\\ \text{Total cost of units purchased on September 19}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units after June 13 sales + }\\ \text{Number of units purchased on September 19}\end{array}\right)}\\ =\frac{\text{\$86,000+\$36,800}}{\text{2,000 units+800 units}}\\ =\frac{\text{\$122,800}}{\text{2,800 units}}\\ =\$44\end{array}$

Compute the weighted average cost of inventory after November 23 purchase.

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on November 23 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units after September 19 purchases + }\\ \text{Total cost of units purchased on November 23}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units after September 19 purchases + }\\ \text{Number of units purchased on November 23}\end{array}\right)}\\ =\frac{\text{\$122,800+\$57,600}}{\text{2,800 units+1,200 units}}\\ =\frac{\text{\$180,400}}{\text{4,000 units}}\\ =\$45.1\end{array}$

Conclusion

Therefore, the cost of goods sold is $231,180 and the value of ending inventory is $99,220.

d.

To determine

Determine the inventory costing method choose by the C products.

Explanation of Solution

1.

If the goods flow is to be reflected through the business, use FIFO method because the perishable goods should be used before they become obsolete, expire, or become old (editions).

2.

If the company wants to minimize its income taxes should choose LIFO method because cost of goods sold is higher and eventually this method shows lowest net income as well as lowest taxes.

3.

If the company wants to report higher net income, FIFO method should be used because high price products are used earlier under the FIFO method and the low price or older price results in the low cost of goods sold. Eventually low cost of goods sold results in high net income.