Chapter 6, Problem 16BE

To determine

Ascertain the cost of goods sold and the ending inventory cost under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method.

Explanation of Solution

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. So, the value of the ending inventory consist the recent cost for the remaining unsold items.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory consist the initial cost for the remaining unsold items.

Weighted-average Cost Method: In this method, the inventories are priced at the average rate of goods available for sales.

Ascertain the cost of goods sold and the ending inventory cost under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method as follows:

(a) first-in first-out method:

Perpetual Inventory Costing Method (FIFO)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	13	6,500				200	12	2,400
							500	13	6,500
									8,900
March 1				200	12	2,400	350	13	4,550
				150	13	1,950			4,550
May 18	400	15	6,000				350	13	4,550
							400	15	6,000
									10,550
July 1				350	13	4,550	350	15	5,250
				50	15	750
									5,250
October 23	100	17	1,700				350	15	5,250
							100	18	1,700
Total	1,000		14,200	750		9,650	400		6,950

Table (1)

Therefore, the cost of ending merchandised inventory and cost of goods sold under FIFO are $6,950 and $9,650 respectively.

(b) Last-in first-out method:

Perpetual Inventory Costing Method (LIFO)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	16	6,500				200	12	2,400
							500	13	6,500
									8,900
March 1				350	13	4,550	200	12	2,400
							150	13	1,950
									4,350
May 18	400	15	6,000				200	12	2,400
							150	13	1,950
							400	15	6,000
									10,350
July 1				400	15	6,000	200	12	2,400
							150	13	1,950
									4,350
October 23	100	17	1,700				200	12	2,400
							150	13	1,950
							100	17	1,700
Total	1,000		14,200	750		10,550	450		6,050

Table (2)

Therefore, the cost of ending merchandised inventory and cost of goods sold under LIFO are $6,050 and $10,550 respectively.

(c) Weighted average cost method:

Perpetual Inventory Costing Method (Weighted-average)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	13	6,500				700	12.72 (1)	8,900
March 1				350	12.72	4,452	350	12.72	4,452
May 18	400	15	6,000				750	13.94 (2)	10,455
July 1				400	13.94	5,576	350	13.94	4,879
October 23	100	17	1,700				450	14.62 (3)	6,579
Total	1,000		14,200	750		10,028	400		6,579

Table (3)

Therefore, the cost of ending merchandised inventory and cost of goods sold under weighted average method are $6,579 and $10,028 respectively.

Working note:

Calculate the average cost of inventory balance after the purchase on May 18.

Here,

Details	Units	Cost ($)
Beginning Inventory	200	2,400
Purchase on February 11	500	6,500
Goods Available for Sale on February 11	700	8,900

Table (4)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$8,900}{\text{700 Units}}\\ =\text{\$12}\text{.72}\end{array}$ (1)

Calculate the average cost of inventory balance after the purchase on February 11.

Here,

Details	Units	Cost ($)
Inventory after the Sale on March 1	350	4,452
Purchase on May 18	400	6,000
Goods Available for Sale on February 11	750	10,452

Table (5)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$10,452}{\text{750 Units}}\\ =\text{\$13}\text{.936}\end{array}$ (2)

Calculate the average cost of inventory balance after the purchase on October 23.

Here,

Details	Units	Cost ($)
Inventory after the Sale on July 1	350	4,879
Purchase on October 23	100	1,700
Goods Available for Sale on February 11	450	6,579

Table (5)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$6,579}{\text{450 Units}}\\ =\text{\$14}\text{.62}\end{array}$ (3)