Question

Hamilton company uses a periodic inventory system, at the end of the annuanl accounting period, December 31,2015, the accounting records provided the following information for product 1:
Unit Unit Cost
Inventory, December 31, 2014 2000 $5
For the year 2015:
Purchase, March 21 6000 4
Purchase, August 1 4000 2
Inventory, December 31, 2015 3000

Required:
Compute ending inventory and cost of goods sold under FIFO, LIFO, and average cost inventory costing methods.

Answer 1

Answer:

FIFO : Ending Inventory = $6,000, Cost of Goods Sold = $36,000

LIFO : Ending Inventory = $36,000, Cost of Goods Sold = $28,000

Weighted Average Cost Method : Ending Inventory = $10,500, Cost of Goods Sold = $31,500

Explanation:

FIFO

Assumes that the first goods received by business will be the first ones to be delivered to the final customer.

Ending Inventory

Ending Inventory = Units left × Earliest Price

                             = 3000 units × $2

                             = $6,000

Cost of goods sold

Cost of goods sold : 2000 units × $5 =  $10,000

                                  6000 units × $4 = $24,000

                                  1000 units  × $2 =   $2,000

                                 Total                    =  $36,000

LIFO

Assumes that the last goods purchased are the first ones to be issued to the final customer.

Ending Inventory

Ending Inventory      2000 units × $5 =  $10,000

                                  6000 units × $4 = $24,000

                                  1000 units  × $2 =   $2,000

                                 Total                    =  $36,000

Cost of goods sold

Cost of goods sold : 4000 units × $2 =  $8,000

                                  5000 units × $4 = $20,000

                                  Total                   =  $28,000

Weighted Average Cost Method

The average cost of goods held is recalculated each time a new delivery of goods is received Issues are then priced out at this weighted average cost.

First Calculate the Average Cost

Average Cost = Total Cost / Total Units

                       = (2000 × $5 + 6000 × $4 + 4000 × $2) / 12,000

                       = $42,000 / 12,000

                       = $3.50

Ending Inventory

Ending Inventory = Units left × Average Price

                             = 3000 units × $3.50

                             = $10,500

Cost of goods sold

Ending Inventory = Units Sold × Average Price

                             = 9,000 units × $3.50

                             = $31,500