Concept explainers
Alternative cost flows
Warnerwoods Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for March. (For specific identification, the March 9 sale consisted of 80 units from beginning inventory and 340 units from the March 5 purchase; the March 29 sale consisted of 40 units from the March 18 purchase and 120 units from the March 25 purchase.)
Date | Activities | Units Acquired at Cost | Units Sold at Retail |
Mar. 1 | Beginning Inventory......... | 100 units @ $50.00 per unit | |
Mar. 5 | Purchase……….. | 400 units @ $55.00 per unit | |
Mar. 9 | Sales.................. | 420 units @ $85.00 per unit | |
Mar. 18 | Purchase……….. | 120 units @ $60.00 per unit | |
Mar. 25 | Purchase.................. | 200 units @ $62.00 per unit | |
Mar. 29 | Saks..................... | _________ | 160 units @ $95.00 per unit |
Totals..................... | 820 units | 580 units |
Required
- 1. Compute cost of goods available for sale and the number of units available for sale.
- 2. Compute the number of units in ending inventory.
- 3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
- 4. Compute gross profit earned by the company for each of the four costing methods in part 3.
1.
Compute cost of goods available for sale and number of units available for sale.
Explanation of Solution
Cost of goods available for sale: Cost of goods available for sale represents the sum of beginning merchandise and purchased merchandise. Cost of goods available for sale is not reported on any of the financial statements because the cost of goods available for sale is either sold, or remained as ending inventory, at the end of the year.
Compute cost of goods available for sale and number of units available for sale:
Particulars | Units | Cost of goods |
Beginning inventory | 100 units @ $50.00 | $5,000 |
March 5 | 400 units @ $55.00 | 22,000 |
March 18 | 120 units @ $60.00 | 7,200 |
March 25 | 200 units @ $62.00 | 12,400 |
Units available | 820 units | |
Cost of goods available for sale | $46,600 |
Table (1)
Therefore, units available are 820units and cost of goods available for sale is $46,600.
2.
Compute the number of units in ending inventory.
Explanation of Solution
Compute the number of units in ending inventory:
Units available (from part 1) | 820 units |
Less: Units sold (420 + 160) | 580 units |
Ending Inventory (units) | 240 units |
Table (2)
Hence, the ending inventory is 240 units.
3.
Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification.
Explanation of Solution
First-in-First-Out (FIFO): In this method, items purchased initially are sold first. Therefore, the value of the ending inventory contains the recent cost for the remaining unsold items.
a) Compute the cost assigned to ending inventory using FIFO:
Date | Goods Purchased | Cost of Goods Sold | Inventory Balance |
March 1 | 100 @ $50 = $5,000 | ||
March 5 | 400 @ $55 = $22,000 | 100 @ $50 | |
400 @ $55 = $27,000 | |||
March 9 | 100 @ $50 = $ 5,000 | 80 @ $55 = $ 4,400 | |
320 @ $55 = $17,600 | |||
March 18 | 120 @ $60 = $ 7,200 | 80 @ $55 | |
120 @ $60 = $11,600 | |||
March 25 | 200 @ $62 = $ 12,400 | 80 @ $55 | |
120 @ $60 | |||
200 @ $62 = $24,000 | |||
March 29 | 80 @ $55 = $ 4,400 | 40 @ $60 | |
80 @ $60 = $ 4,800 | 200 @ $62 = $14,800 | ||
$ 31,800 |
Table (3)
Therefore, the cost assigned to ending inventory using FIFO is $14,800.
Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory contains the initial cost for the remaining unsold items.
b) Compute the cost assigned to ending inventory using LIFO:
Date | Goods Purchased | Cost of Goods Sold | Inventory Balance |
March 1 | 100 @ $50 = $5,000 | ||
March 5 | 400 @ $55 = $22,000 | 100 @ $50 | |
400 @ $55 = $27,000 | |||
March 9 | 400 @ $55 = $ 22,000 | 80 @ $50 = $ 4,000 | |
20 @ $50 = $1,000 | |||
March 18 | 120 @ $60 = $ 7,200 | 80 @ $50 | |
120 @ $60 = $11,200 | |||
March 25 | 200 @ $62 = $ 12,400 | 80 @ $50 | |
120 @ $60 | |||
200 @ $62 = $23,600 | |||
March 29 | 160 @ $62 = $9,920 | 40 @ $60 | |
200 @ $62 = $13,680 | |||
$ 32,920 |
Table (4)
Therefore, the cost assigned to ending inventory using LIFO is $13,680.
Weighted average cost method: Under average cost method, company calculates a new average after every purchase. It is determined by dividing the cost of goods available for sale by the units on hand.
c) Compute the cost assigned to ending inventory using weighted average cost:
Date | Goods Purchased | Cost of Goods Sold | Inventory Balance |
March 1 | 100 @ $50 = $5,000 | ||
March 5 | 400 @ $55 = $22,000 | 100 @ $50 | |
400 @ $55 = $27,000 | |||
Average cost is $54 | |||
March 9 | 420 @ $54 = $ 22,680 | 80 @ $54 = $ 4,320 | |
Average cost is $54 | |||
March 18 | 120 @ $60 = $ 7,200 | 80 @ $54 | |
120 @ $60 = $11,520 | |||
Average cost is $57.60 | |||
March 25 | 200 @ $62 = $ 12,400 | 80 @ $54 | |
120 @ $60 | |||
200 @ $62 = $23,920 | |||
Average cost is $59.80 | |||
March 29 | 160 @ $59.8 = $9,568 | 240 @ $59.80 = $14,352 | |
$ 32,248 | |||
Average cost is $59.80 |
Table (5)
Therefore, the cost assigned to ending inventory using weighted average cost is $14,352.
Specific identification inventory system: It is one of the inventory valuation methods where the purchase cost of each item in the inventory is identified and used to calculate the ending inventory and cost of goods sold.
d) Compute the cost assigned to ending inventory using weighted average cost:
Particulars | Amount ($) |
Total goods available for sale (requirement 1) | $46,600 |
Less: Cost of goods sold (1) | ($32,540) |
Ending inventory | $14,060 |
Table (6)
Therefore, the cost assigned to ending inventory using specific identification method is $14,060.
Working note:
Calculate the cost of goods sold:
Particulars | Units @ cost per unit | Amount ($) |
Beginning inventory | 80 units @ $50 | $4,000 |
Purchase on March 5 | 340 units @55 | $18,700 |
Purchase on March 18 | 40 units @60 | $2,400 |
Purchase on March 25 | 120 units @62 | $7,440 |
Cost of goods sold | 32,540 |
(1)
Table (7)
4.
Compute the gross profit earned by the Company W for each of the four costing methods in requirement 3.
Explanation of Solution
Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.
Compute the gross profit earned by the Company W for each of the four costing methods in requirement 3:
FIFO |
LIFO |
Weighted Average |
Specific Identification | |
Sales (2) | $50,900 | $50,900 | $50,900 | $50,900 |
Less: Cost of goods sold | 31,800 | 32,920 | 32,248 | 32,540 |
Gross profit | $ 19,100 | $17,980 | $ 18,652 | $ 18,360 |
Table (8)
Gross profit under FIFO method is higher ($19,100) and under LIFO method is lower ($17,980)
Working note:
Calculate the sales amount:
Sales on March 9 | $35,700 |
Sales on March 29 | $15,200 |
Total sales amount | $50,900 |
(2)
Table (9)
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Chapter 6 Solutions
Principles of Finan. Accounting, Chapter 1-17 (Loose)
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