Chapter 6, Problem 5AP

a.

To determine

Compute the cost of goods sold for 2012 and the ending inventory balance at December 31, 2012 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 A as on December 31, 2012 using perpetual FIFO:

Date	Purchased			Sold			Balance
	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)
January 1							1,000	20	20,000
February 2				400	20	8,000
							600	20	12,000
April 6	1,800	22	39,600				1,800	22	39,600
July 10				600	20	12,000	800	22	17,600
				1,000	22	22,000
August 9	800	26	20,800				800	22	17,600
							800	26	20,800
October 23				800	22	17,600	800	26	20,800
December 30	1,200	29	34,800				800	26	20,800
							1,200	29	34,800
						$59,600	2,000		$55,600

Table (1)

Conclusion

Therefore, the value of cost of goods sold is $59,600 and ending inventory is $55,600.

b.

To determine

Compute the cost of goods sold for 2012 and the ending inventory balance at December 31, 2012 using FIFO 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 A as on December 31, 2012 using perpetual LIFO:

Date	Purchased			Sold			Balance
	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)	Quantity	Unit Cost ($)	Total Cost ($)
January 1							1,000	20	20,000
February 2				400	20	8,000	600	20	12,000
April 6	1,800	22	39,600				600	20	12,000
							1,800	22	39,600
July 10				1,600	22	35,200	600	20	12,000
							200	22	4,400
August 9	800	26	20,800				600	20	12,000
							200	22	4,400
							800	26	20,800
October 23				800	26	20,800	600	20	12,000
							200	22	4,400
December 30	1,200	29	34,800				600	20	12,000
							200	22	4,400
							1,200	29	34,800
						$64,000	2,000		$51,200

Table (2)

Conclusion

Therefore, the cost of goods sold is $64,000 and the value of ending inventory is $51,200.

c.

To determine

Compute the cost of goods sold for 2012 and the ending inventory balance at December 31, 2012 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 A as on December 31, 2012 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							1,000	20	20,000
February 2				400	20	8,000	600	20	12,000
April 6	1,800	22	39,600				1,800	22	39,600
							2,400	21.5	51,600
July 10				1,600	21.5	34,400	800	21.5	17,200
							800	21.5	17,200
August 9	800	26	20,800				800	26	20,800
							1,600	23.75	38,000
October 23				800	23.75	19,000	800	23.75	19,000
December 30	1,200	29	34,800				1,200	29	34,800
						$61,400	2,000	26.90	$53,800

Table (3)

Working Notes:

Compute the weighted average cost of inventory after April 6 purchase.

$\begin{array}{l}\text{Weighted average }\\ \text{cost on April 6 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on February 2 + }\\ \text{Total cost of units purchased on April 6}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on February 2 + }\\ \text{Number of units purchased on April 6}\end{array}\right)}$

$\begin{array}{c}=\frac{\$12,000+\$39,600}{\text{600 units}+1,800\text{ units}}\\ =\frac{\text{\$51,600}}{\text{2,400 units}}\\ =\$21.50\end{array}$

Compute the weighted average cost of inventory after August 9 purchase.

$\begin{array}{l}\text{Weighted average }\\ \text{cost on August 9 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units after July 10 sales + }\\ \text{Total cost of units purchased on August 9}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units after July 10 sales + }\\ \text{Number of units purchased on August 9}\end{array}\right)}$

$\begin{array}{c}=\frac{\$17,200+\$20,800}{\text{800 units+800 units}}\\ =\frac{\text{\$38,000}}{\text{1,600 units}}\\ =\$23.75\end{array}$

Compute the weighted average cost of inventory after December 30 purchase.

$\begin{array}{l}\text{Weighted average }\\ \text{cost on December 30 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units after October 23 sales + }\\ \text{Total cost of units purchased on December 30}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units after October 23 sales + }\\ \text{Number of units purchased on December 30}\end{array}\right)}$

$\begin{array}{c}=\frac{\$19,000+\$34,800}{\text{800 units+1,200 units}}\\ \text{=}\frac{\text{\$53,800}}{\text{2,000 units}}\\ =\$26.9\end{array}$

Conclusion

Therefore, the cost of goods sold is $61,400 and the value of ending inventory is $53,800.

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 time-out, 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. The low price or older price results in the low cost of goods sold. Low cost of goods sold results in high net income.