Chapter 6, Problem 1AP

Alternative cost flows

Warnerwoods Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for March. (For specific identification, the March 9 sale consisted of 80 units from beginning inventory and 340 units from the March 5 purchase; the March 29 sale consisted of 40 units from the March 18 purchase and 120 units from the March 25 purchase.)

Date	Activities	Units Acquired at Cost	Units Sold at Retail
Mar. 1	Beginning Inventory.........	100 units @ $50.00 per unit
Mar. 5	Purchase………..	400 units @ $55.00 per unit
Mar. 9	Sales..................		420 units @ $85.00 per unit
Mar. 18	Purchase………..	120 units @ $60.00 per unit
Mar. 25	Purchase..................	200 units @ $62.00 per unit
Mar. 29	Saks.....................	_________	160 units @ $95.00 per unit
	Totals.....................	820 units	580 units

Required

1. 1. Compute cost of goods available for sale and the number of units available for sale.
2. 2. Compute the number of units in ending inventory.
3. 3. Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification. (Round all amounts to cents.)
4. 4. Compute gross profit earned by the company for each of the four costing methods in part 3.

To determine

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

Explanation of Solution

Cost of goods available for sale: Cost of goods available for sale represents the sum of beginning merchandise and purchased merchandise. Cost of goods available for sale is not reported on any of the financial statements because the cost of goods available for sale is either sold, or remained as ending inventory, at the end of the year.

Compute cost of goods available for sale and number of units available for sale:

Particulars	Units	Cost of goods
Beginning inventory	100 units @ $50.00	$5,000
March 5	400 units @ $55.00	22,000
March 18	120 units @ $60.00	7,200
March 25	200 units @ $62.00	12,400
Units available	820 units
Cost of goods available for sale		$46,600

Table (1)

Therefore, units available are 820units and cost of goods available for sale is $46,600.

To determine

Compute the number of units in ending inventory.

Explanation of Solution

Compute the number of units in ending inventory:

Units available (from part 1)	820 units
Less: Units sold (420 + 160)	580 units
Ending Inventory (units)	240 units

Table (2)

Hence, the ending inventory is 240 units.

To determine

Compute the cost assigned to ending inventory using (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification.

Explanation of Solution

First-in-First-Out (FIFO): In this method, items purchased initially are sold first. Therefore, the value of the ending inventory contains the recent cost for the remaining unsold items.

a) Compute the cost assigned to ending inventory using FIFO:

Date	Goods Purchased	Cost of Goods Sold	Inventory Balance
March 1			100 @ $50      = $5,000
March 5	400 @ $55 = $22,000		100 @ $50
			400 @ $55      = $27,000
March 9		100 @ $50 = $  5,000	80 @ $55      = $  4,400
		320 @ $55 = $17,600
March 18	120 @ $60 = $  7,200		80 @ $55
			120 @ $60      = $11,600
March 25	200 @ $62 = $ 12,400		80 @ $55
			120 @ $60
			200 @ $62      = $24,000
March 29		80 @ $55 = $  4,400	40 @ $60
		80 @ $60 = $  4,800	200 @ $62      = $14,800
		$ 31,800

Table (3)

Therefore, the cost assigned to ending inventory using FIFO is $14,800.

Last-in-First-Out (LIFO): In this method, items purchased recently are sold first. So, the value of the ending inventory contains the initial cost for the remaining unsold items.

b) Compute the cost assigned to ending inventory using LIFO:

Date	Goods Purchased	Cost of Goods Sold	Inventory Balance
March 1			100 @ $50      = $5,000
March 5	400 @ $55 = $22,000		100 @ $50
			400 @ $55      = $27,000
March 9		400 @ $55 = $  22,000	80 @ $50      = $  4,000
		20 @ $50 = $1,000
March 18	120 @ $60 = $  7,200		80 @ $50
			120 @ $60      = $11,200
March 25	200 @ $62 = $ 12,400		80 @ $50
			120 @ $60
			200 @ $62      = $23,600
March 29		160 @ $62 = $9,920	40 @ $60
			200 @ $62      = $13,680
		$ 32,920

Table (4)

Therefore, the cost assigned to ending inventory using LIFO is $13,680.

Weighted average cost method: Under average cost method, company calculates a new average after every purchase. It is determined by dividing the cost of goods available for sale by the units on hand.

c) Compute the cost assigned to ending inventory using weighted average cost:

Date	Goods Purchased	Cost of Goods Sold	Inventory Balance
March 1			100 @ $50      = $5,000
March 5	400 @ $55 = $22,000		100 @ $50
			400 @ $55      = $27,000
		Average cost is $54 $\left(\$27,000÷500\text{units}\right)$
March 9		420 @ $54 = $  22,680	80 @ $54      = $  4,320
		Average cost is $54 $\left(\$4,320÷80\text{units}\right)$
March 18	120 @ $60 = $  7,200		80 @ $54
			120 @ $60      = $11,520
		Average cost is $57.60 $\left(\$11,520÷200\text{units}\right)$
March 25	200 @ $62 = $ 12,400		80 @ $54
			120 @ $60
			200 @ $62      = $23,920
		Average cost is $59.80 $\left(\$23,920÷400\text{units}\right)$
March 29		160 @ $59.8 = $9,568	240 @ $59.80 = $14,352
		$ 32,248
		Average cost is $59.80 $\left(\$14,352÷240\text{units}\right)$

Table (5)

Therefore, the cost assigned to ending inventory using weighted average cost is $14,352.

Specific identification inventory system: It is one of the inventory valuation methods where the purchase cost of each item in the inventory is identified and used to calculate the ending inventory and cost of goods sold.

d) Compute the cost assigned to ending inventory using weighted average cost:

Particulars	Amount ($)
Total goods available for sale (requirement 1)	$46,600
Less: Cost of goods sold (1)	($32,540)
Ending inventory	$14,060

Table (6)

Therefore, the cost assigned to ending inventory using specific identification method is $14,060.

Working note:

Calculate the cost of goods sold:

Particulars	Units @ cost per unit	Amount ($)
Beginning inventory	80 units @ $50	$4,000
Purchase on March 5	340 units @55	$18,700
Purchase on March 18	40 units @60	$2,400
Purchase on March 25	120 units @62	$7,440
Cost of goods sold		32,540

(1)

Table (7)

To determine

Compute the gross profit earned by the Company W for each of the four costing methods in requirement 3.

Explanation of Solution

Gross margin (gross profit): Gross margin is the amount of revenue earned from goods sold over the costs incurred for the goods sold.

Compute the gross profit earned by the Company W for each of the four costing methods in requirement 3:

	FIFO	LIFO	Weighted Average	Specific Identification
Sales (2)	$50,900	$50,900	$50,900	$50,900
Less: Cost of goods sold	31,800	32,920	32,248	32,540
Gross profit	$ 19,100	$17,980	$ 18,652	$ 18,360

Table (8)

Gross profit under FIFO method is higher ($19,100) and under LIFO method is lower ($17,980)

Working note:

Calculate the sales amount:

Sales on March 9 $\left(420\text{units @ \$85}\text{.00}\right)$	$35,700
Sales on March 29 $\left(160\text{units @ \$95}\text{.00}\right)$	$15,200
Total sales amount	$50,900

(2)

Table (9)