Chapter 5, Problem 4AP

1.

To determine

Compute cost of goods available for sale and the number of units available for sale.

Explanation of Solution

Calculate cost of goods available for sale and the number of units available for sale.

Cost of Goods Available For Sale
Date	Particulars	Units (A)	Per Unit (B)	Amount (A× B)
Jan 1	Beginning Inventory	600	$45	$27,000
Feb 1	Purchase	400	$42	$16,800
Mar 13	Purchase	200	$27	$5,400
Aug 21	Purchase	100	$50	$5,000
Sep 5	Purchase	500	$46	$23,000
	Total	1,800		$77,200

Table (1)

Therefore, total cost of goods available for sale amount is $77,200, and the number of units available for sale is 1,800 units.

2.

To determine

Compute the number of units in ending inventory.

Explanation of Solution

Calculate number of units in ending inventory as follows:

$\begin{array}{c}\text{Ending inventory (units)}\text{= Cost of Goods available for sale }-\text{Cost of goods sold}\\ =1,800\text{units}-1,400\text{units}\\ \text{=}400\text{units}\end{array}$

Working note:

Calculate cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold = 15th March sale + 10th September sale}\\ \text{= 800}\text{units + 600}\text{units}\\ \text{= 1,400}\text{units}\end{array}$ (1)

3.

To determine

Compute the cost assigned to ending inventory using the following methods:

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

Explanation of Solution

(a)

Compute the cost assigned to ending inventory using FIFO method as follows:

Date	Particulars	Units (A)	Per Unit (B)	Amount (A× B)
Sept 5	Ending Inventory	400	$46	$18,400
	Total Ending inventory	400		$18,400

Table (2)

(b)

Compute the cost assigned to ending inventory using LIFO method as follows:

Date	Particulars	Units (A)	Per Unit (B)	Amount (A× B)
Jan 1	Ending Inventory	400	$45	$18,000
	Total Ending inventory	400		$18,000

Table (3)

(c)

Compute the cost assigned to ending inventory using weighted average method as follows:

$\begin{array}{c}\text{Ending inventory cost}\text{=}\text{Ending inventory units }\times \text{Weighted average}\text{per unit}\\ \text{=}\text{400}\text{units }\times \text{\$42}\text{.89}\text{per unit}\\ \text{= \$17,156}\end{array}$

Working note:

Calculate weighted average per unit.

$\begin{array}{c}\text{Weighted average per unit = }\frac{\text{Total cost of goods available for sale}\text{in amount}}{\text{Total cost of goods avail for sale}\text{in units}}\\ =\frac{\$77,200}{1,800\text{units}}\\ =\$42.89\text{per unit}\end{array}$ (2)

(d)

Compute the cost assigned to ending inventory using specific identification method as follows:

Date	Particulars	Units (A)	Per Unit (B)	Amount (A× B)
Feb 10	Ending Inventory	100	$42	$4,200
Aug 21	Ending Inventory	50	$50	$2,500
Sep 5	Ending Inventory	250	$46	$11,500
	Total Ending inventory	400		$18,200

Table (4)

4.

To determine

Compute gross profit earned by the company for each of the four costing methods in part 3.

Explanation of Solution

Calculate gross profit earned by the company for each of the four costing methods as follows:

Particulars	FIFO	LIFO	Weighted Average	Specific Identification
Sales	$150,000	$150,000	$150,000	$150,000
Less: Cost of goods sold	$58,800	$59,200	$59,000	$60,044
Gross profit	$46,200	$45,800	$46,000	$44,956

Table (5)

Working notes:

Calculate sales amount.

$\begin{array}{c}\text{Sales}\text{amount =}\left(800\text{units }\times \text{\$75}\right)+\left(600\text{units}\times \text{\$75}\right)\\ =\$60,000+\$45,000\\ =\$105,000\end{array}$ (3)

Calculate cost of goods sold.

Particulars	FIFO	LIFO	Weighted Average	Specific Identification
Cost of goods available for sale	$77,200	$77,200	$77,200	$77,200
Less: Ending Inventory	$18,400	$18,000	$17,156	$18,200
Cost of goods sold	$58,800	$59,900	$60,044	$59,000

Table (6)

5.

To determine

Identify the method of inventory costing which the manager will prefer, if he earns a bonus based on a percentage of gross profit.

Explanation of Solution

The Manger would prefer a FIFO method, because comparing to all four methods FIFO method only giving more income.  If he prefers, FIFO method means, he will get a bonus based on a percentage of gross profit.