Chapter 6, Problem 6.5E

Calculate inventory amounts when costs are declining (LO6–3)

During the year, Trombley Incorporated has the following Inventory transactions.

 For the entire year, the company sells 81 units of inventory for $30 each.

Required:

  1.    Using FIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

  2.    Using LIFO, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

  3.    Using weighted-average cost, calculate (a) ending inventory, (b) cost of goods sold, (c) sales revenue, and (d) gross profit.

  4.    Determine which method will result in higher profitability when inventory costs are declining.

To determine

To calculate: The cost of ending inventory.

Explanation of Solution

Perpetual Inventory System:

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.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

• Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
November, 11	24	18	432
Ending Inventory	24		432

Table 1

Note:

• The ending inventory is 24 units.
• In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.
• Therefore, the ending inventory of 24 units from November 11^th purchases.

Working notes:

• Calculate the total Cost and units of Goods Available for Sales:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
Beginning inventory	20	22	440
Purchases on May, 4	25	21	525
Purchases on June, 9	30	20	600
Purchases on November, 11	30	18	540
Total goods available for sales	105		2,105

Table 2

• Calculate the units of ending inventory:

$\begin{array}{c}\text{Ending inventory units = Total goods available for sale – sales}\\ \text{=105 Units – 81Units}\\ \text{= 24Units}\end{array}$

Conclusion

Therefore, the cost of Ending Inventory in the FIFO is $432.

To determine

To calculate: The cost of goods sold.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
Beginning inventory	20	22	440
Purchases on May, 4	25	21	525
Purchases on June, 9	30	20	600
Purchases on November, 11	6	18	108
Cost of goods sold	81		1,673

Table 3

Note:

• units are sold.
• As it is FIFO method the earlier purchased items will sell first.
• Hence, the cost of goods sold will be the earlier purchased items.

Conclusion

Therefore, the cost of goods sold in the FIFO Method is $1,673.

To determine

To calculate: the Sales Revenue.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue }=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =81\times \$30\\ =\$2,430\end{array}$ (1)

Conclusion

Therefore, the sales revenue in FIFO method is $2.430.

To determine

To calculate: The gross profit.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount ($)
Sales	2,430 (1)
Less: Cost of Goods Sold (Refer to table 4)	($1,673)
Gross Margin	757

Table 4

Conclusion

Therefore, the amount of Gross margin in FIFO method is $757.

To determine

To calculate: The cost of ending inventory.

Explanation of Solution

Perpetual Inventory System:

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.

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.

• Calculate the cost of ending inventory.

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Inventory	20	22	440
Purchase on March, 4	4	21	84
Ending Inventory	24	22	524

Table 5

Note:

• The ending inventory is 24 units (Refer to Table 2).
• In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.
• Therefore, the ending inventory of 24 units is from the beginning inventory.

Conclusion

Therefore, the cost of Ending Inventory in the LIFO method is $524.

To determine

To calculate: The cost of goods sold.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
Purchases on November, 11	30	18	540
Purchases on June, 9	30	20	600
Purchases on May, 4	21	21	441
Cost of goods sold	81		1,581

Table 6

Note:

• units are sold.
• As it is LIFO method the recent purchased items will sell first.
• Hence, the cost of goods sold will be the recent purchased items.

Conclusion

Therefore, the Cost of Goods Sold in the LIFO Method is $1,581.

To determine

To calculate: the Sales Revenue.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue }=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =81\times \$30\\ =\$2,430\end{array}$ (2)

Conclusion

Therefore, the sales revenue in LIFO method is $2,430.

To determine

To calculate: The gross profit.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount  ($)
Sales	2,430 (2)
Less: Cost of Goods Sold (Refer to table 8)	($1,581)
Gross Margin	849

Table 7

Conclusion

Therefore, the amount of Gross margin in LIFO method is $849.

To determine

To calculate: The cost of ending inventory.

Explanation of Solution

Perpetual Inventory System:

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.

Weighted-average cost method:

Under Weighted average cost method, the company calculates a new average cost after every purchase is made. It is determined by dividing the cost of goods available for sale by the units on hand.

• Calculate the cost of ending inventory:

$\begin{array}{c}\text{Cost of Ending inventory}=\left(\begin{array}{l}\text{Number of units in Ending inventory}\\ \times \text{Weighted-average cost per unit (3)}\end{array}\right)\\ =24\text{ units }\times \text{ \$20}\text{.04762}\\ =\text{\$481}\text{.14288}\end{array}$ (4)

Working note:

• Calculate the Weighted-average cost:

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$2,105}{\text{105 Units}}\\ =\$20.04762\end{array}$ (3)

Conclusion

Therefore, the cost of Ending Inventory in the Weighted-average-cost Method is $481,142.

To determine

To calculate: The cost of goods sold.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of Goods Sold=}\left(\begin{array}{l}\text{Number of units Sold ×Weighted}\\ \text{average cost per unit (3)}\end{array}\right)\\ \text{=}\text{81 units×\$20}\text{.04762}\\ \text{=\$1,623}\text{.86}\end{array}$ (5)

Conclusion

Therefore, the Cost of goods sold in the Weighted-average-cost Method is $1,623.86.

To determine

To calculate: the Sales Revenue.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue}=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =81\times \$30\\ =\$2,430\end{array}$ (7)

Conclusion

Therefore, the sales revenue in Weighted-average-cost Method is $2,430.

To determine

To calculate: The gross profit.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount  ($)
Sales	2,430 (7)
Less: Cost of Goods Sold	(1,623.86) (5)
Gross Margin	806.14

Table 8

Conclusion

Therefore, the amount of Gross margin in Weighted-average-cost Method is $806.14.

To determine

The method that will result in higher profitability when inventory costs are declining.

Explanation of Solution

Compare the profitability in the three methods:

Methods	FIFO	LIFO	WA
Gross Margin	$757	$849	806.14

Table 9

Conclusion

The gross margin computed by using the LIFO method results higher profitability when inventory costs are declining in comparison to the other two methods.