Chapter 6, Problem 3BPSB

To determine

Perpetual Inventory system is an inventory system in which a organization continuously update its inventory records. All the movements related to inventory are updated continuously such as purchase quantity, sales quantity, and purchase or sales return etc.

There are several methods of calculating the value of inventory in closing stock which are as below:

FIFO method (First In First Out) is the most using method of inventory valuation. The quantity which comes first in stock will be sold first. In closing inventory the quantity will be counted from the last purchase and so on.

LIFO method (Last In First Out) is the method in which the quantity which purchase in last before sale transaction will be sold first. In closing inventory the quantity will be counted from the beginning inventory and purchase thereafter.

Weighted Average method is the most commonly used method after FIFO method. In weighted average the quantity of all purchases and beginning inventory is clubbed and then a weighted average rate is calculated and closing inventory is valued at weighted average rate.

Specific Identification method is the method in which the quantity is specifically identified that from which lot or purchases the closing stock is available and the closing inventory is valued by taking rates and quantities of that specific lot(s) from which closing inventory is available.

Under perpetual method a job card is prepared for each lot and calculation is done for each lot/transactions accordingly.

Requirement-1:

To Calculate:

In the given question we have to calculate the following details under perpetual inventory system:

1. Cost of goods and quantity available for sale

Answer to Problem 3BPSB

Solution:

1. Cost of goods available for sales = 249,300

Quantity available for sale = $\text{150}+350+80+100=\text{ 680 Units}$

Explanation of Solution

Explanation:

Cost of goods available for sales

Beginning Inventory	150*300	45,000
May 6 purchases	350*350=122,500	167,500
May 17 Purchases	80*450 = 36,000	203,500
May 25 Purchases	100*458 = 45,800	249,300
Total		249,300

To determine

Requirement-2:

To calculate:

We have to calculate units in closing stock under perpetual inventory system.

Answer to Problem 3BPSB

Solution:

Units in closing stock = 200 units

Explanation of Solution

Explanation:

Units in closing stock = $\text{Units available for sales - units sold}$

$=\text{ 680 -480 }=\text{ 200 units}$

To determine

Requirement-3:

To calculate:

We have to calculate cost of closing inventory using FIFO, LIFO, Weighted Average and Specific Identification method.

Answer to Problem 3BPSB

Solution:

Cost of closing Inventory :

FIFO = 88,800

LIFO = 62,500

Weighted average = 75,600

Specific Identification = 74,500

Explanation of Solution

Explanation:

Inventory valuation:

FIFO

Date	Particulars	Purchase price	Cost of goods sold	Closing stock inventory	Closing Inventory (Units * Price)
	Beginning Inventory	150 *300 = 45,000		150	150*300=45,000
May 6	Purchase 350 units	350*350= 122,500		150+350=500	(150*300) + (350* 350) =167,500
May 9	Sales 180 units		150 *300 + 30*350 = 55,500	500-180 =320	320*350 = 112,000
May 17	Purchase 80 units	80*450 = 36,000		320+80 = 400	(320*350)+ 80*450 = 148,000
May 25	Purchase 100 units	100*458 = 45,800		400+100 =500	(320*350)+ (80*450)+ (100*458) =193,800
May 30	Sales 300 units		(300*350 = 105,000	500-300=200	(20*350)+ (80*450)+ (100*458) =88,800
	Total		160,500		Closing stock = 88,800

LIFO

Date	Particulars	Purchase price	Cost of goods sold	Closing stock inventory	Closing Inventory (Units * Price)
	Beginning Inventory	150 *300 = 45,000		150	150*300=45,000
May 6	Purchase 350 units	350*350= 122,500		150+350=500	(150*300) + (350* 350) =167,500
May 9	Sales 180 units		180 *350 = 63,000	500-180 =320	(150*300)+(170*350) = 104,500
May 17	Purchase 80 units	80*450 = 36,000		320+80 = 400	(150*300)+(170*350) + (80*450) = 140,500
May 25	Purchase 100 units	100*458 = 45,800		400+100 =500	(150*300)+(170*350) + (80*450) +(100*458) =186,300
May 30	Sales 300 units		(100*458) +(80*450)+ (120*350) = 123,800	500-300=200	(150*300)+(50*350) =62,500
	Total		186,800		Closing stock = 62,500

Weighted average:

Date	Particular	Purchase price	Cost of goods sold	Closing stock inventory	Closing Inventory (Units * Price)	Weighted average cost
	Beginning Inventory	150 *300 = 45,000		150	45,000	45,000/150 = 300
May 6	Purchase 350 units	350*350= 122,500		150+350=500	45,000+122,500 =167,500	167,500/500= 335
May 9	Sales 180 units		180*335 =60,300	500-180 =320	167,500-60,300= 107,200	107,200/320 = 335
May 17	Purchase 80 units	80*450 = 36,000		320+80 = 400	107,200 + 36,000 = 143,200	143,200/ 400 =358
May 25	Purchase 100 units	100*458 = 45,800		400+100 =500	143,200 + 45,800 = 189,000	189,000/ 500 = 378
May 30	Sales 300 units		300 * 378 = 113,400	500-300=200	189,000-113,400 =75,600	75,600/ 200 = 378
	Total		173,700		Closing stock = 75,600

Specific Identification

Date	Particulars	Purchase price	Cost of goods sold	Closing stock inventory	Closing Inventory (Units * Price)
	Beginning Inventory	150 *300 = 45,000		150	150*300=45,000
May 6	Purchase 350 units	350*350= 122,500		150+350=500	(150*300) + (350* 350) =167,500
May 9	Sales 180 units		(80*300)+(100 *350 = 59,000	500-180 =320	(70*300)+(250*350) = 108,500
May 17	Purchase 80 units	80*450 = 36,000		320+80 = 400	(70*300)+(250*350) + (80*450) = 144,500
May 25	Purchase 100 units	100*458 = 45,800		400+100 =500	(70*300)+(250*350) + (80*450)+ (100*458) =190,300
May 30	Sales 300 units		(200*350)+ (100*458) = 115,800	500-300=200	(70*300)+(50*350) + (80*450) = 74,500
	Total		174,800		Closing stock = 74,500

To determine

Requirement-4:

To calculate:

We have to calculate gross profit under FIFO, LIFO, and Weighted Average and Specific Identification method under perpetual inventory system.

Answer to Problem 3BPSB

Solution:

Gross profit under all costing methods:

Particular	FIFO Method	LIFO Method	Weighted Average	Specific Identification
Gross profit	475,500	449,200	462,300	461,200

Explanation of Solution

Explanation:

Gross profit under all costing methods:

Particular	FIFO Method	LIFO Method	Weighted Average	Specific Identification
Sales price ( 180*1,200)+ (300*1,400)	636,000	636,000	636,000	636,000
Cost of goods sold	160,500	186,800	173,700	174,800
Gross profit	475,500	449,200	462,300	461,200

To determine

Requirement-5:

To determine:

We have to determine that manager will prefer valuation method as it earns on percentage of gross profit.

Answer to Problem 3BPSB

Solution:

Manager will prefer FIFO method.

Explanation of Solution

Explanation:

Manager will prefer FIFO method as the gross profit is highest in FIFO method $ 475,500 and his earning will be highest under FIFO method valuation.