Question

A company uses the periodic average cost method to account for inventory. For the year, the company had the following beginning inventory and purchases:
Beginning inventory on January 1

100 units

at

$

2,800

per unit

Purchase on March 1

400 units

at

$

3,000

per unit

Purchase on September 1

800 units

at

$

3,200

per unit


Sales for the year totaled 1,000 units, leaving 300 units on hand at the end of the year. The company reported ending inventory for $900,000. Which of the following is correct?

The amount reported for ending inventory is incorrect because management used a simple average instead of weighted-average to calculate the unit cost of inventory for the year.
The amount reported for ending inventory cannot be determined with the information given because the amount depends on which of the 1,000 units were assumed to be sold.
The amount reported for ending inventory is incorrect because the unit cost of ending inventory should be the average cost of the last 300 units purchased.
The amount reported for ending inventory is correct.

Answer 1

Answer:

The amount reported for ending inventory is incorrect because management used a simple average instead of weighted-average to calculate the unit cost of inventory for the year.

Explanation:

a. Using weighted-average

Number of units available for sales = 100 + 400 + 800 = 1,300 units

Cost inventory available for sale = (100 * $2,800) + (400 * $3,000) + (800 * $3,200) = $4,040,000

Periodic cost per unit = $4,040,000 / 1,300 = $3,107.69

Total periodic ending inventory = $3,107.69 * 300 = $932,307.69  

b. Using simple average

Inventory cost per unit = ($2,800 + $3,000 + $3,200) / 3 = $3,000  

Total ending inventory = $3,000 * 300 = $900,000

Decision

The correct ending inventory should be $932,307.69  

Therefore, the amount reported for ending inventory is incorrect because management used a simple average instead of weighted-average to calculate the unit cost of inventory for the year.