Question

Applying and Analyzing Inventory Costing Methods

Answer 1

Answer:

Applying and Analyzing Inventory Costing Methods

Chen

a1. Cost of goods sold   2,800 units = $93,200

a2. Ending Inventory  2,000 units = $79,600

b1. Cost of goods sold 2,800 units = $106,800

b2. Ending Inventory  2,000 units = $66,000

c1. Cost of goods sold 2,800 units = $100,800 (2,800 *$36)

c2. Ending inventory 2,000 units = $72,000 (2,000 * $36)

d1. To reflect the physical flow of goods, I would choose the FIFO method.

d2. To minimize income taxes for the period only, I would choose the LIFO method.

d3. LIFO method would report the largest amount of income for the period.

NB: LIFO is chosen only for the current period.  In the subsequent period the gain will reverse.

Explanation:

a) Data and Calculations:

                                   Units    Unit    Cost Cost   Total Cost

Beginning Inventory  1,000    $32     $32,000     $32,000

Purchase #1               1,800       34        61,200       93,200

Purchase #2                800       38       30,400      123,600

Purchase #3              1,200       41       49,200      172,800

Total                         4,800               $172,800

Average cost = $172,800/4,800 = $36

Sales during the period = 2,800 units

b) FIFO (First-in, first-out) method:

Computation of:

1. Cost of goods sold

Beginning Inventory  1,000    $32     $32,000

Purchase #1               1,800       34        61,200

Cost of goods sold   2,800                $93,200

2. Ending Inventory

Purchase #2                800       38       30,400

Purchase #3              1,200       41       49,200

Ending Inventory      2,000               $79,600

c) LIFO (Last-in, first-out) method:

Computation of:

1. Cost of goods sold

Purchase #1                 800       34        27,200

Purchase #2                800       38       30,400

Purchase #3              1,200       41       49,200

Cost of goods sold   2,800              $106,800

2. Ending Inventory

Beginning Inventory  1,000    $32     $32,000

Purchase #1               1,000       34       34,000

Ending Inventory      2,000                $66,000

d) Average Method:

                                   Units    Unit    Cost Cost   Total Cost  Average Cost

Beginning Inventory  1,000    $32     $32,000     $32,000       $32

Purchase #1               1,800       34        61,200       93,200       $33.29

Purchase #2                800       38       30,400      123,600       $34.33

Purchase #3              1,200       41       49,200      172,800       $36