Chapter 6, Problem 14E

Periodic: Cost flow assumptions

Lopez Company reported the following current-year data for its only product. The company uses a periodic inventory system, and its ending inventory consists of 150 units—50 from each of the last three purchases. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) weighted average, (c) FIFO, and (d) LIFO. (Round per unit costs and inventory amounts to cents.) Which method yields the highest net income?

Jan.	1	Beginning inventory.......	96 units @ $2.00 = $ 192
Mar.	7	Purchase................	220 units @ $2.25 = 495
July	28	Purchase................	544 units @ $2.50 = 1,360
Oct.	3	Purchase................	480 units @ $2.80= 1,344
Dec	19	Purchase................	160 units @ $2.90 = 464
		Totals...................	1,500 units $3,855

Check Inventory; LIFO, $313.50; FIFO, $435.00

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.