Chapter 5, Problem 4BP

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)
May 1	Beginning Inventory	150	$300	$45,000
May 6	Purchase	350	$350	$122,500
May 17	Purchase	80	$450	$36,000
May 25	Purchase	100	$458	$45,800
	Total	680		$249,300

Table (1)

Therefore, total cost of goods available for sale amount is $249,300, and the number of units available for sale is 680 units.

2.

To determine

Compute the number of units in ending inventory.

Explanation of Solution

Calculate number of units in ending inventory as follows:

$\begin{array}{c}\text{Ending inventory (units)}\text{= Cost of Goods available for sale }-\text{Cost of goods sold}\\ =680\text{units}-480\text{units}\\ \text{=}200\text{units}\end{array}$

Working note:

Calculate cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold = 9th May sale + 30th May sale}\\ \text{= 180}\text{units + 300}\text{units}\\ \text{= 480}\text{units}\end{array}$ (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)
May 25	Ending Inventory	100	$458	$45,800
May 17	Ending Inventory	80	$450	$36,000
May 6	Ending Inventory	20	$350	$7,000
	Total Ending inventory	200		$88,800

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)
May 1	Ending Inventory	150	$300	$45,000
May 6	Ending Inventory	50	$350	$17,500
	Total Ending inventory	200		$62,500

Table (3)

(c)

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

$\begin{array}{c}\text{Ending inventory cost}\text{=}\text{Ending inventory units }\times \text{Weighted average}\text{per unit}\\ \text{=}2\text{00}\text{units }\times \text{\$366}\text{.62}\text{per unit}\\ \text{= \$73,324}\end{array}$

Working note:

Calculate weighted average per unit.

$\begin{array}{c}\text{Weighted average per unit = }\frac{\text{Total cost of goods available for sale}\text{in amount}}{\text{Total cost of goods avail for sale}\text{in units}}\\ =\frac{\$249,300}{680\text{units}}\\ =\$366.62\text{per unit}\end{array}$ (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)
May 1	Ending Inventory	70	$300	$21,000
May 6	Ending Inventory	50	$350	$17,500
May 17	Ending Inventory	80	$450	$36,000
	Total Ending inventory	400		$74,500

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	$636,000	$636,000	$636,000	$636,000
Less: Cost of goods sold	$160,500	$186,800	$175,976	$174,800
Gross profit	$475,500	$449,200	$460,024	$461,200

Table (5)

Working notes:

Calculate sales amount.

$\begin{array}{c}\text{Sales}\text{amount =}\left(180\text{units }\times \text{\$1,200}\right)+\left(300\text{units}\times \text{\$1,400}\right)\\ =\$216,000+\$420,000\\ =\$636,000\end{array}$ (3)

Calculate cost of goods sold.

Particulars	FIFO	LIFO	Weighted Average	Specific Identification
Cost of goods available for sale	$249,300	$249,300	$249,300	$249,300
Less: Ending Inventory	$88,800	$62,500	$73,324	$74,500
Cost of goods sold	$160,500	$186,800	$175,976	$174,800

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.