Chapter 6, Problem 9BE

To determine

Ascertain the cost of goods sold and the ending inventory cost under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method.

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.

Ascertain the cost of goods sold and the ending inventory cost under (a) first-in first-out, (b) last-in first-out, and (c) weighted average cost method as follows:

(a) first-in first-out method:

Perpetual Inventory Costing Method (FIFO)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	13	6,500				200	12	2,400
							500	13	6,500
									8,900
March 1				200	12	2,400	300	13	3,900
				200	13	2,600			3,900
May 18	400	15	6,000				300	13	3,900
							400	15	6,000
									10,900
July 1				300	13	3,900	300	15	4,500
				100	15	1,500
									4,500
October 23	100	18	1,800				300	15	4,500
							100	18	1,800
Total	1,000		14,300	800		10,400	400		6,300

Table (1)

Therefore, the cost of ending merchandised inventory and cost of goods sold under FIFO are $6,300 and $10,400 respectively.

(b) Last-in first-out method:

Perpetual Inventory Costing Method (LIFO)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	16	6,500				200	12	2,400
							500	13	6,500
									8,900
March 1				400	13	5,200	200	12	2,400
							100	13	1,300
									3,700
May 18	400	15	6,000				200	12	2,400
							100	13	1,300
							400	15	6,000
									9,700
July 1				400	15	6,000	200	12	2,400
							100	13	1,300
									3,700
October 23	100	18	1,800				200	12	2,400
							100	13	1,300
							100	18	1,800
Total	1,000		14,300	800		11,200	400		5,500

Table (2)

Therefore, the cost of ending merchandised inventory and cost of goods sold under LIFO are $5,400 and $12,000 respectively.

(c) Weighted average cost method:

Perpetual Inventory Costing Method (Weighted-average)
Date	Purchases			Cost of Goods Sold			Inventory on Hand
	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)	Quantity (Units)	Unit Cost ($)	Total Cost ($)
January 1							200	12	2,400
February 11	500	13	6,500				700	12.72 (1)	8,900
March 1				400	12.72	5,088	300	12.72	3,812
May 18	400	15	6,000				700	14.02 (2)	9,812
July 1				400	14.02	5,608	300	14.02	4,204
October 23	100	18	1,800				400	15.01 (3)	6,004
Total	1,000		14,300	800		10,696	400		6,004

Table (3)

Therefore, the cost of ending merchandised inventory and cost of goods sold under weighted average method are $6,004 and $10,696 respectively.

Working note:

Calculate the average cost of inventory balance after the purchase on May 18.

Here,

Details	Units	Cost ($)
Beginning Inventory	200	2,400
Purchase on February 11	500	6,500
Goods Available for Sale on February 11	700	8,900

Table (4)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$8,900}{\text{700 Units}}\\ =\text{\$12}\text{.72}\end{array}$ (1)

Calculate the average cost of inventory balance after the purchase on February 11.

Here,

Details	Units	Cost ($)
Inventory after the Sale on March 1	300	3,812
Purchase on May 18	400	6,000
Goods Available for Sale on February 11	700	9,812

Table (5)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$9,812}{\text{700 Units}}\\ =\text{\$14}\text{.02}\end{array}$ (2)

Calculate the average cost of inventory balance after the purchase on October 23.

Here,

Details	Units	Cost ($)
Inventory after the Sale on July 1	300	4,204
Purchase on October 23	100	1,800
Goods Available for Sale on February 11	400	6,004

Table (5)

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{ Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$6,004}{\text{400 Units}}\\ =\text{\$15}\text{.01}\end{array}$ (3)