Chapter 6, Problem 1BP

Alternative cost flows

Ming Company uses a perpetual inventory system. It entered into the following purchases and sales transactions for April. (For specific identification, the April 9 sale consisted of 8 units from beginning inventory and 27 units from the April 6 purchase; the April 30 sale consisted of 12 units from beginning inventory, 3 units from the April 6 purchase, and 10 units from the April 25 purchase.)

Date	Activities	Units Acquired at Cost	Units Sold at Retail
Apr. 1	Beginning inventory.......	20 units @ $3,000.00 per unit
Apr. 6	Purchase...............	30 units @ $3,500.00 per unit
Apr. 9	Sales.....................	...	35 units @ $12,000.00 per unit
Apr. 17	Purchase ...............	5 units @ $4,500.00 per unit
Apr. 25	Purchase...............	10 units @ $4,800.00 per unit
Apr. 30	Sales.....................		25 units @ $14,000.00 per unit
	Total.....................	65 units	60 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	20 units @ $3,000	$60,000
April 6	30 units @ $3,500	105,000
April 17	5 units @ $4,500	22,500
April 25	20 units @ $4,800	48,000
Units available	65 units
Cost of goods available for sale		$235,500

Table (1)

Therefore, units available are 65units and cost of goods available for sale is $235,500.

To determine

Compute the number of units in ending inventory.

Explanation of Solution

Compute the number of units in ending inventory:

Units available (refer requirement 1)	65 units
Less: Units sold $\left(35+25\right)$	(60 units)
Ending Inventory (units)	5 units

Table (2)

Hence, the ending inventory is 5 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
April 1			20 @ $3,000= $60,000
April 6	30 @ $3,500 = $105,000		20 @ $3,000
			30@$3,500 = $165,000
April 9		20 @ $3,000 = $60,000	15 @ $3,500 = $52,500
		15 @ $3,500 = $52,500
April 17	5 @ $4,500 = $22,500		15 @ $3,500
			5 @ $4,500 = $75,000
April 25	10 @  4,800 = $48,000		15 @ $3,500
			5 @ $4,500
			10 @  4,800= $123,000
April 30		15 @ $3,500 = $52,500	5 @  4,800 = $24,000
		5 @ $4,500 = $22,500
		5 @ $4,800= $24,000
		$ 211,500

Table (3)

Therefore, the cost assigned to ending inventory using FIFO is $24,000.

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
April 1			20 @ $3,000  = $60,000
April 6	30@$3,500 = $105,000		20 @ $3,000  = $60,000
			30@$3,500 = $105,000
March 9		30@$3,500 = $105,000	15 @ $3,000 = $45,000
		5 @ $3,000 = $15,000
April 17	5 @ $4,500 = $22,500		15 @ $3,000 = $45,000
			5 @ $4,500 = $22,500
April 25	10@$4,800 = $48,000		15 @ $3,000 = $45,000
			5 @ $4,500 = $22,500
			10 @ 4,800= $48,000
April 30		10 @ $4,800 = $48,000	5 @  3,000= $15,000
		5 @ $4,500   = $22,500
		10@$3,000   = $30,000
		= $220,500

Table (4)

Therefore, the cost assigned to ending inventory using LIFO is $15,000.

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
April 1			20 @ $3,000  = $60,000
April 6	30@ $3,500 = $105,000		20 @ $3,000  = $60,000
			30@$3,500=$105,000
		Average cost is $3,300 $\left(\$165,000÷50\text{units}\right)$
April 9		35@ $3,300= $115,500	15 @ $3,300 = $49,500
		Average cost is $3,300 $\left(\$49,500÷15\text{units}\right)$
April 17	5 @ $4,500 = $22,500		15 @ $3,300 = $49,500
			5 @ $4,500= $22,500
		Average cost is $3,600 $\left(\$72,000÷20\text{units}\right)$
April 25	10@ 4,800 = $48,000		15@ $3,300= $49,500
			5 @ $4,500= $22,500
			10 @ 4,800= $48,000
		Average cost is $4,000 $\left(\$120,000÷30\text{units}\right)$
April 30		25@$4,000= 100,000	5 @ $4,000= $20,000
		$ 215,500
		Average cost is $4,000 $\left(\$20,000÷5\text{units}\right)$

Table (5)

Therefore, the cost assigned to ending inventory using weighted average cost is $20,000.

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)	$235,500
Less: Cost of goods sold (1)	($213,000)
Ending inventory	$22,500

Table (6)

Therefore, the cost assigned to ending inventory using specific identification method is $22,500.

Working note:

Calculate the cost of goods sold:

Particulars	Units @ cost per unit	Amount ($)
Beginning inventory	20 units @ $3,000	$60,000
Purchase on April 6	30 units @ $3,500	$105,500
Purchase on April 25	10 units @ $4,800	$48,000
Cost of goods sold		213,000

(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)	$770,000	$770,000	$770,000	$770,000
Less: Cost of goods sold	211,500	220,500	215,500	213,000
Gross profit	$558,500	$549,500	$554,500	$557,000

Table (8)

Gross profit under FIFO method is higher ($558,500) and under LIFO method is lower ($549,500)

Working note:

Calculate the sales amount:

Sales on April 9 $\left(35\text{units @ \$12,000}\right)$	$420,000
Sales on April 30 $\left(25\text{units @ \$14,000}\right)$	$350,000
Total sales amount	$770,000

(2)

Table (9)