Chapter 6, Problem 3AP

Alternative cost flows

Montoure Company uses a perpetual inventory system. It entered into the following calendar-year purchases and sales transactions. (For specific identification, units sold consists of 600 units from beginning inventory,  300 from the February 10 purchase, 200 from the March 13 purchase, 50 from the August 21 purchase, and 250 from the September 5 purchase.)

Date	Activities	Units Acquired at Cost	Units Sold at Retail
Jan. 1	Beginning inventory.....	600 units @ $45.00 per unit
Feb. 10	Purchase....................	400 units @ $42.00 per unit
Mar. 13	Purchase....................	200 units @ $27.00 per unit
Mar. 15	Sales.......................		800 units @ $ 75.00 per unit
Aug. 21	Purchase.................	100 units @ $50.00 per unit
Sep. 5	Purchase....................	500 units @ $46.00 per unit
Sep.10	Sales.......................		600 units @ $75.00 per unit
	Total.......................	1,800 units	1,400 units

Required

1. 1. Compute cost of goods available for sale and the number of units available for sale.
2. 2. Compute the number of units in ending inventory.
3. 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. 4. Compute gross profit earned by the company for each of the four costing methods in part 3.
5. 5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory costing will the manager likely prefer?

To determine

Ascertain the cost of goods available for sale, and the number of units available for sales.

Explanation of Solution

Ascertain the cost of goods available for sale, and the number of units available for sales as follows:

Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning balance	600	45	27,000
Add: Purchases
February 10	400	42	16,800
March 13	200	27	5,400
August 21	100	50	5,000
September 5	500	46	23,000
Total Goods available for Sale	1,800		77,200

Table (1)

Therefore, the number of units available for sales is 1,800 units, and the cost of goods available for sale is $77,200.

To determine

Ascertain the number of units in ending inventory.

Explanation of Solution

Ascertain the number of units in ending inventory as follows:

Details	Number of Units
Total Goods available for Sale	1,800
Less: Sales:
March 15	800
September 10	600
Ending Inventory	400

Table (2)

Therefore, the number of units in ending inventory is 400.

To determine

Ascertain the cost assigned to ending inventory under (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification.

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.

Specific identification method: Specific identification method identifies the cost of each item in ending inventory by separating purchases. In this method, the value of ending inventory is computed based on the lower of cost or market value.

Ascertain the cost assigned to ending inventory under (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification as follows:

(a) FIFO

Table (3)

Therefore, the cost of ending inventory under FIFO is $18,400.

(b) LIFO

Table (4)

Therefore, the cost of ending inventory under LIFO is $18,000.

(c) Weighted average method:

Refer working note 1 and 2 for calculation of weighted average cost

Table (5)

Therefore, the cost of ending inventory under weighed average method is $17,760.

Working note:

Calculate the weighted average cost of inventory after March 13purchase

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on March 15 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on January 1+}\\ \text{Total cost of units purchased on February 10 + }\\ \text{Total cost of units purchased on March 13}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on January 1 + }\\ \text{Number of units purchased on February 10+}\\ \text{Number of units purchased on March 13}\end{array}\right)}\\ \text{=}\frac{\text{\$27,000+\$16,800+\$5,400}}{\text{600 units + 400 units +200 units}}\\ \text{=}\frac{\text{\$49,200}}{\text{1,200 units}}\\ \text{=\$41}\end{array}$ (1)

Calculate the weighted average cost of inventory after September 5 purchase

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on March 15 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on}\text{March 15+}\\ \text{Total cost of units purchased on August 21 + }\\ \text{Total cost of units purchased on September 5}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on March 15 + }\\ \text{Number of units purchased on August 21 +}\\ \text{Number of units purchased on September 21}\end{array}\right)}\\ \text{=}\frac{\text{\$16,400+\$5,000+\$23,000}}{\text{400 units + 100 units +500 units}}\\ \text{=}\frac{\text{\$44,400}}{\text{1,000 units}}\\ \text{=\$44}\text{.4}\end{array}$ (2)

(d) Specific identification method:

Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Cost of goods available for sale (refer table 1)			77,200
Less: Cost of goods sold
Beginning inventory	600	45	27,000
February 10	300	42	12,600
March 13	200	27	5,400
August 21	50	50	2,500
September 5	250	46	11,500
Ending inventory			18,200

Table (6)

Therefore, the cost of ending inventory under specific identification method is $18,200.

To determine

Ascertain the gross profit earned by the company for the each of the given methods.

Explanation of Solution

Ascertain the gross profit earned by the company for the each of the given methods as follows:

Particulars	FIFO	LIFO	Specific Identification	Weighted Average
Sales	$ 105,000	$ 105,000	$105,000	$ 105,000
Less: Cost of goods sold	$ 58,800	$ 59,200	$ 59,000	$ 59,440
Gross profit	$ 46,200	$ 45,800	$46,000	$ 45,560

Table (7)

To determine

Identify the inventory method which is preferred by the manager, if company’s manger earns a bonus based on a percent of gross profit.

Explanation of Solution

Identify the inventory method which is preferred by the manager, if company’s manger earns a bonus based on a percent of gross profit as follows:

In this case, gross profit under FIFO method ($46,200) is more than the other three methods. Hence, the manager of Company would likely to prefer the FIFO method.