Accounting for Changing Inventory Costs
In October, Nicole eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. Nicole’s Getaway Spa (NGS) would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. NGS would keep track of its new inventory using a perpetual inventory system.
On December 31, NGS purchased 10 units at a total cost of $6 per unit. Nicole purchased 25 more units at $8 in February, in March, Nicole purchased 15 units at $10 per unit. In May, 50 units were purchased at $9.80 per unit. In June, NGS sold 50 units at a selling price of $12 per unit and 35 units at $10 per unit.
Required:
- 1. Explain whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed.
- 2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method.
- 3. Calculate the inventory turnover ratio (round to one decimal place), using the inventory purchased on December 31 as the beginning inventory. The supplier reported that the typical inventory turnover ratio was 6.0. How does NGS’s ratio compare?
- 4. Would a different inventory cost flow assumption allow Nicole’s Getaway Spa to better minimize its income tax?
Want to see the full answer?
Check out a sample textbook solutionChapter 7 Solutions
FUND.OF.FIN.ACCT.-CONNECT >CUSTOM<
- Click the Chart sheet tab. On the screen is a column chart showing ending inventory costs. During a deflationary period, which bar (A, B, or C) represents FIFO costing, which represents LIFO costing, and which represents weighted average? Explain your reasoning. On January 4 following year-end, Rio Enterprises received a shipment of 60 units of product costing 580 each. These units had been ordered by Del in December and had been shipped to him on December 27. They were shipped FOB shipping point. Revise the FIFOLIFO3 worksheet to include this shipment. Preview the printout to make sure that the worksheet will print neatly on one page, and then print the worksheet. Save the completed file as FIFOLIFOT. Using the FIFOLIFO3 file, prepare a 3-D bar (stacked) chart showing the cost of goods sold and ending inventory under each of the four inventory cost flow assumptions. No Chart Data Table is needed. Use the values in the Calculations Section of the worksheet for your chart. Enter your name somewhere on the chart. Save the file again as FIFOLIFO3. Print the chart.arrow_forwardNote that Barbaras Bistro in Figure 1-2 prepares monthly performance reports. Do you think that it would be a good idea for Barbara to switch to just an annual performance report in an effort to reduce its accounting costs?arrow_forwardChassen Company, a cracker and cookie manufacturer, has the following unit costs for the month of June: A total of 100,000 units were manufactured during June, of which 10,000 remain in ending inventory. Chassen uses the first-in, first-out (FIFO) inventory method, and the 10,000 units are the only finished goods inventory at June 30. Under the absorption costing concept, the value of Chassens June 30 finished goods inventory would be: a. 50,000. b. 70,000. c. 85,000. d. 145,000.arrow_forward
- Watko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon Hessel Total Total purchases (cartons) 5,000 3,000 8,000 Average purchase price (per carton) $ 170 $ 186 $ 176 Number of deliveries 40 20 60 Percentage of cartons delivered late. 30% 15% 25% The Accounting Department recorded $243,750 as the cost of late deliveries to customers. Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. Also…arrow_forwardWatko Entertainment Systems (WES) buys audio and video components for assembling home entertainment systems from two suppliers, Bacon Electronics and Hessel Audio and Video. The components are delivered in cartons. If the cartons are delivered late, the installation for the customer is delayed. Delayed installations lead to contractual penalties that call for WES to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following: Bacon Hessel Total Total purchases (cartons) 5,000 3,000 8,000 Average purchase price (per carton) $ 176 $ 192 $ 182 Number of deliveries 40 20 60 Percentage of cartons delivered late. 30% 15% 25% The Accounting Department recorded $249,600 as the cost of late deliveries to customers. Exercise 10-38 (Algo) Activity-Based Costing of Suppliers (LO 10-3, 4) Required: Assume that the average quality, measured by the percentage of late…arrow_forward[The following information applies to the questions displayed below.] Hult Games buys electronic components for manufacturing from two suppliers, Milan Components and Dundee Parts. If the components are delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Hult to reimburse a portion of the purchase price to the customer. During the past quarter, the purchasing and delivery data for the two suppliers showed the following. Milan Dundee Total Total purchases (cartons) 91,000 39,000 130,000 Average purchase price (per carton) $ 22.00 $ 24 $ 22.60 Number of deliveries 60 40 100 Percentage of late deliveries 25 % 10 % 19 % The Accounting Department recorded $533,000 as the cost of late deliveries to customers. Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the…arrow_forward
- Sizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company's staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden X537 model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay emailed this information to Tina Vereen, the chief financial officer, and recommended that the company apply the lower-of-cost-or-market method to the Hayden 537X semiconductors…arrow_forwardChef Erin completes her inventory on Thursday evening and finds that she has $11, 500 in product on hand. Throughout the week, she purchases $500 in dry goods, $900 in dairy products, and 51000 in meat products. At the end of the week, she conducts inventory and finds that she has $10,000 in inventory left on hand. Please answer the following questions: What was the COST OF GOODS SOLD during this time period? SHOW YOUR MATH! If weekly Sales or Revenue is $12,895, please calculate the Food Cost Percentage for that time period. BE SURE TO SHOW YOUR WORK"arrow_forwardSizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company’s staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden 537X model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay e-mailed this information to Tina Vereen, the chief financial officer, and recommended that the company apply the lower-of-cost-or market method to the Hayden 537X semiconductors…arrow_forward
- Sizemo Elektroniks sells semiconductors that are used in games and small toys. The company has been extremely successful in recent years, recording an increase in earnings each of the past six quarters. At the end of the current quarter, Jay Shulz, the company’s staff accountant, calculated the ending inventory for the semiconductors and was surprised to find that the quantity of the Hayden 537X model had not changed during the quarter. Jay confirmed his calculation with the inventory control manager, who indicated that sales of the Hayden 537X had stopped when the Hayden 637X semiconductor was released early in the quarter. Jay researched the issue further and found that the Hayden 637X semiconductor has the same applications as the Hayden 537X, but has more computing power and a lower cost than the 537X. Jay e-mailed this information to Tina Vereen, thechief financial officer, and recommended that the company apply the lower-of-cost-ormarket method to the Hayden 537X semiconductors…arrow_forwardXYZ Bakery's general manager was puzzled by the results of the income statement for the month which showed a net loss for the bakery. The owner is puzzled because of the volume of customers who flood the bakery each day for baked goods. The owner calculated the cost of direct materials and direct labor and was sure the prices were set right and overhead was estimated based on prior year expenses. How is it possible that volumes could be high but the store could lose money? What are other factors the owner should consider to make sure next year's financial statements report net income?arrow_forwardJack Jones, the materials manager at Precision Enterprises,is beginning to look for ways to reduce inventories. A re-cent accounting statement shows the following inventoryinvestment by category: raw materials, $3,129,500; work-in-process, $6,237,000; and finished goods, $2,686,500.This year’s cost of goods sold will be about $32.5 mil-lion. Assuming 52 business weeks per year, express totalinventory asa. Weeks of supplyb. Inventory turnsarrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Excel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage LearningPrinciples of Cost AccountingAccountingISBN:9781305087408Author:Edward J. Vanderbeck, Maria R. MitchellPublisher:Cengage Learning