Concept explainers
Alternative cost flows
Ming Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for April. (For specific identification, the April 9 sale consisted of 8 units from beginning inventory and 27 units from the April 6 purchase; the April 30 sale consisted of 12 units from beginning inventory, 3 units from the April 6 purchase, and 10 units from the April 25 purchase.)
Date | Activities | Units Acquired at Cost | Units Sold at Retail |
Apr. 1 | Beginning inventory....... | 20 units @ $3,000.00 per unit | |
Apr. 6 | Purchase............... | 30 units @ $3,500.00 per unit | |
Apr. 9 | Sales..................... | ... | 35 units @ $12,000.00 per unit |
Apr. 17 | Purchase ............... | 5 units @ $4,500.00 per unit | |
Apr. 25 | Purchase............... | 10 units @ $4,800.00 per unit | |
Apr. 30 | Sales..................... | 25 units @ $14,000.00 per unit | |
Total..................... | 65 units | 60 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 | 20 units @ $3,000 | $60,000 |
April 6 | 30 units @ $3,500 | 105,000 |
April 17 | 5 units @ $4,500 | 22,500 |
April 25 | 20 units @ $4,800 | 48,000 |
Units available | 65 units | |
Cost of goods available for sale | $235,500 |
Table (1)
Therefore, units available are 65units and cost of goods available for sale is $235,500.
2.
Compute the number of units in ending inventory.
Explanation of Solution
Compute the number of units in ending inventory:
Units available (refer requirement 1) | 65 units |
Less: Units sold | (60 units) |
Ending Inventory (units) | 5 units |
Table (2)
Hence, the ending inventory is 5 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 |
April 1 | 20 @ $3,000= $60,000 | ||
April 6 | 30 @ $3,500 = $105,000 | 20 @ $3,000 | |
30@$3,500 = $165,000 | |||
April 9 | 20 @ $3,000 = $60,000 | 15 @ $3,500 = $52,500 | |
15 @ $3,500 = $52,500 | |||
April 17 | 5 @ $4,500 = $22,500 | 15 @ $3,500 | |
5 @ $4,500 = $75,000 | |||
April 25 | 10 @ 4,800 = $48,000 | 15 @ $3,500 | |
5 @ $4,500 | |||
10 @ 4,800= $123,000 | |||
April 30 | 15 @ $3,500 = $52,500 | 5 @ 4,800 = $24,000 | |
5 @ $4,500 = $22,500 | |||
5 @ $4,800= $24,000 | |||
$ 211,500 |
Table (3)
Therefore, the cost assigned to ending inventory using FIFO is $24,000.
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 |
April 1 | 20 @ $3,000 = $60,000 | ||
April 6 | 30@$3,500 = $105,000 | 20 @ $3,000 = $60,000 | |
30@$3,500 = $105,000 | |||
March 9 | 30@$3,500 = $105,000 | 15 @ $3,000 = $45,000 | |
5 @ $3,000 = $15,000 | |||
April 17 | 5 @ $4,500 = $22,500 | 15 @ $3,000 = $45,000 | |
5 @ $4,500 = $22,500 | |||
April 25 | 10@$4,800 = $48,000 | 15 @ $3,000 = $45,000 | |
5 @ $4,500 = $22,500 | |||
10 @ 4,800= $48,000 | |||
April 30 | 10 @ $4,800 = $48,000 | 5 @ 3,000= $15,000 | |
5 @ $4,500 = $22,500 | |||
10@$3,000 = $30,000 | |||
= $220,500 |
Table (4)
Therefore, the cost assigned to ending inventory using LIFO is $15,000.
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 |
April 1 | 20 @ $3,000 = $60,000 | ||
April 6 | 30@ $3,500 = $105,000 | 20 @ $3,000 = $60,000 | |
30@$3,500=$105,000 | |||
Average cost is $3,300 | |||
April 9 | 35@ $3,300= $115,500 | 15 @ $3,300 = $49,500 | |
Average cost is $3,300 | |||
April 17 | 5 @ $4,500 = $22,500 | 15 @ $3,300 = $49,500 | |
5 @ $4,500= $22,500 | |||
Average cost is $3,600 | |||
April 25 | 10@ 4,800 = $48,000 | 15@ $3,300= $49,500 | |
5 @ $4,500= $22,500 | |||
10 @ 4,800= $48,000 | |||
Average cost is $4,000 | |||
April 30 | 25@$4,000= 100,000 | 5 @ $4,000= $20,000 | |
$ 215,500 | |||
Average cost is $4,000 |
Table (5)
Therefore, the cost assigned to ending inventory using weighted average cost is $20,000.
Specific identification inventory system: It is one of the inventory valuation methods where the purchase cost of each item in the inventory is identified and used to calculate the ending inventory and cost of goods sold.
d) Compute the cost assigned to ending inventory using weighted average cost:
Particulars | Amount ($) |
Total goods available for sale (requirement 1) | $235,500 |
Less: Cost of goods sold (1) | ($213,000) |
Ending inventory | $22,500 |
Table (6)
Therefore, the cost assigned to ending inventory using specific identification method is $22,500.
Working note:
Calculate the cost of goods sold:
Particulars | Units @ cost per unit | Amount ($) |
Beginning inventory | 20 units @ $3,000 | $60,000 |
Purchase on April 6 | 30 units @ $3,500 | $105,500 |
Purchase on April 25 | 10 units @ $4,800 | $48,000 |
Cost of goods sold | 213,000 |
(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) | $770,000 | $770,000 | $770,000 | $770,000 |
Less: Cost of goods sold | 211,500 | 220,500 | 215,500 | 213,000 |
Gross profit | $558,500 | $549,500 | $554,500 | $557,000 |
Table (8)
Gross profit under FIFO method is higher ($558,500) and under LIFO method is lower ($549,500)
Working note:
Calculate the sales amount:
Sales on April 9 | $420,000 |
Sales on April 30 | $350,000 |
Total sales amount | $770,000 |
(2)
Table (9)
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