Chapter 6, Problem 3BP

Perpetual: Alternative cost flows

Aloha Company uses a perpetual inventory system. It entered into the following calendar-year purchases and sales transactions. (For specific identification, the May 9 sale consisted of 80 units from beginning inventory and 100 units from the May 6 purchase; the May 30 sale consisted of 200 units from the May 6 purchase and 100 units from the May 25 purchase.)

Date	Activities	Units Acquired at Cost	Units Sold at Retail
May 1	Beginning inventory ..........	150 units @ $300.00 per unit
May 6	Purchase....................	350 units @ $350.00 per unit
May 9	Sales.......................		180 units @ $ 1,200.00 per unit
May 17	Purchase...................	80 units @ $450.00 per unit
May 25	Purchase....................	100 units @ $458.00 per unit
May 30	Sales.......................		300 units @ $1,400.00 per unit
	Total........................	680 units	480 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.

Analysis Component

5. If the company’s manager earns a bonus based on a percent of gross profit, which method of inventory costing will the manager likely prefer?

To determine

Ascertain the cost of goods available for sale, and the number of units available for sales.

Explanation of Solution

Ascertain the cost of goods available for sale, and the number of units available for sales as follows:

Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning balance	150	300	45,000
Add: Purchases
May 6	350	350	122,500
May 17	80	450	36,000
May 25	100	458	45,800
Total Goods available for Sale	680		249,300

Table (1)

Therefore, the number of units available for sales is 680 units, and the cost of goods available for sale is $246,300.

To determine

Ascertain the number of units in ending inventory.

Explanation of Solution

Ascertain the number of units in ending inventory as follows:

Details	Number of Units
Total Goods available for Sale	680
Less: Sales:
May 9	180
May 30	300
Ending Inventory	200

Table (2)

Therefore, the number of units in ending inventory is 200.

To determine

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

Explanation of Solution

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

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

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

Weighted-average Cost Method: In this method, the inventories are priced at the average rate of goods available for sales.

Specific identification method: Specific identification method identifies the cost of each item in ending inventory by separating purchases. In this method, the value of ending inventory is computed based on the lower of cost or market value.

Ascertain the cost assigned to ending inventory under (a) FIFO, (b) LIFO, (c) weighted average, and (d) specific identification as follows:

(a) FIFO

Table (3)

Therefore, the cost of ending inventory under FIFO is $88,800.

(b) LIFO

Table (4)

Therefore, the cost of ending inventory under LIFO is 62,500.

(c) Weighted average method:

Refer working note 1 and 2 for calculation of weighted average cost

Table (5)

Therefore, the cost of ending inventory under weighed average method is $75,600.

Working note:

Calculate the weighted average cost of inventory after May 6 purchase

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on March 15 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on May 1+}\\ \text{Total cost of units purchased on May 6}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on May 1 + }\\ \text{Number of units purchased on May 6}\end{array}\right)}\\ \text{=}\frac{\text{\$45,000+\$122,500}}{\text{150 units + 350 units}}\\ \text{=}\frac{\text{\$167,500}}{\text{500 units}}\\ \text{=\$335}\end{array}$ (1)

Calculate the weighted average cost of inventory after May 25 purchase

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{cost on March 15 }\end{array}\}\text{= }\frac{\left(\begin{array}{l}\text{Total cost of units as on May 9+}\\ \text{Total cost of units purchased on May 17 + }\\ \text{Total cost of units purchased on May 25}\end{array}\right)}{\left(\begin{array}{l}\text{Number of units as on May 9 + }\\ \text{Number of units purchased on May 17 +}\\ \text{Number of units purchased on May 25 }\end{array}\right)}\\ \text{=}\frac{\text{\$107,200 +\$36,000+\$45,800}}{\text{320 units + 80 units + 100 units}}\\ \text{=}\frac{\text{\$189,000}}{\text{500 units}}\\ \text{=\$378}\end{array}$ (2)

(d) Specific identification method:

Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Cost of goods available for sale			249,300
Less: Cost of goods sold
Beginning inventory	80	300	24,000
May 6	300	350	105,000
May 25	100	458	45,800
Ending inventory			74,500

Table (6)

Therefore, the cost of ending inventory under specific identification method is $74,500.

To determine

Ascertain the gross profit earned by the company for the each of the given methods.

Explanation of Solution

Ascertain the gross profit earned by the company for the each of the given methods as follows:

Particulars	FIFO	LIFO	Specific Identification	Weighted Average
Sales	$ 636,000	$ 636,000	$ 636,000	$ 636,000
Less: Cost of goods sold	$ 160,500	$ 186,800	$ 173,700	$ 174,800
Gross profit	$ 475,500	$ 449,200	$ 462,300	$ 461,200

Table (7)

To determine

Identify the inventory method which is preferred by the manager, if company’s manger earns a bonus based on a percent of gross profit.

Explanation of Solution

Identify the inventory method which is preferred by the manager, if company’s manger earns a bonus based on a percent of gross profit as follows:

In this case, gross profit under FIFO method ($475,500) is more than the other three methods. Hence, the manager of Company would likely to prefer the FIFO method.