Chapter 5, Problem 14E

To determine

Identify the cost assigned to ending inventory and cost of goods sold using the following methods. And tell which method yields the highest net income.

1. (a) Specific identification
2. (b) Weighted average
3. (c) FIFO
4. (d) LIFO

Explanation of Solution

(a)

Calculate cost assigned to ending inventory using specific identification method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{ending inventory}\end{array})\text{ = }\left(\begin{array}{l}\text{28th}\text{July Purchase + 3rd}\text{October}\\ \text{purchases + 19th December purchases}\end{array}\right)\\ \text{= }\left(50\text{units }\times \text{\$2}\text{.50}\right)+\left(50\text{units }\times \text{\$2}\text{.80}\right)+\left(50\text{units }\times \text{\$2}\text{.90}\right)\\ =\$410\end{array}$

Calculate cost assigned to cost of goods sold using specific identification method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{cost of goods sold}\end{array})\text{ = }\left(\begin{array}{l}\text{Total cost of goods available}\\ \text{ for sale }-\text{Ending inventory}\end{array}\right)\\ \text{=}\text{\$3,855}-\$410\\ =\$3,445\end{array}$

(b)

Calculate cost assigned to ending inventory using weighted average method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{ending inventory}\end{array})\text{ = }\left(\begin{array}{l}\text{Ending inventory in units }\times \\ \text{Weighted average cost per unit}\end{array}\right)\\ \text{=}\text{150}\text{units }\times \text{\$2}\text{.57}\text{per unit}\\ \text{=}\text{\$385}\text{.50}\end{array}$

Calculate cost assigned to cost of goods sold using weighted average method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{cost of goods sold}\end{array})\text{ = }\left(\begin{array}{l}\text{Total cost of goods available}\\ \text{ for sale }-\text{Ending inventory}\end{array}\right)\\ \text{=}\text{\$3,855}-\$385.50\\ =\$3,469.50\end{array}$

Working note:

Calculate weighted average cost per unit.

$\begin{array}{c}\text{Weighted average cost per unit =}\frac{\text{Total cost of goods available for sale in amount}}{\text{Total cost of goods available for sale in units}}\\ =\frac{\$3,855}{1,500\text{units}}\\ =\$2.57\text{per unit}\end{array}$ (1)

(c)

Calculate cost assigned to ending inventory using FIFO method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{ending inventory}\end{array})\text{ = }\left(\text{19th}\text{December Purchase }\right)\\ \text{= }\left(150\text{units }\times \text{\$2}\text{.90}\right)\\ =\$435\end{array}$

Calculate cost assigned to cost of goods sold using FIFO method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{cost of goods sold}\end{array})\text{ = }\left(\begin{array}{l}\text{Total cost of goods available}\\ \text{ for sale }-\text{Ending inventory}\end{array}\right)\\ \text{=}\text{\$3,855}-\$435\\ =\$3,420\end{array}$

(d)

Calculate cost assigned to ending inventory using LIFO method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{ending inventory}\end{array})\text{ = }\left(\text{1st}\text{January Purchase}\text{+ 7th March purchase}\right)\\ \text{= }\left(96\text{units }\times \text{\$2}\right)+\left(54\text{units }\times \text{\$2}\text{.25}\right)\\ =\$313.50\end{array}$

Calculate cost assigned to cost of goods sold using LIFO method.

$\begin{array}{c}\begin{array}{l}\text{Cost assigned to }\\ \text{cost of goods sold}\end{array})\text{ = }\left(\begin{array}{l}\text{Total cost of goods available}\\ \text{ for sale }-\text{Ending inventory}\end{array}\right)\\ \text{=}\text{\$3,855}-\$313.50\\ =\$3,541.50\end{array}$

FIFO method yields the highest net income, because this method only having less cost of goods sold comparing with other inventory method.