Chapter 6, Problem 4E

1. a)

To determine

Calculate the cost of ending inventory using FIFO method.

Explanation of Solution

Perpetual Inventory System:

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

First-in-First-Out:

In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The value of the ending inventory consists of the recent purchased items.

Ending Inventory: It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.

• Calculate the cost of ending inventory:

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
October  6	80	58	4,640
Ending Inventory	80		$4,640

Table 1

Note:

• The ending inventory is 80 units.
• In FIFO method the ending inventory comprises of the inventory purchased last, because the inventory purchased first were sold first.
• Therefore, the ending inventory of 80 units from October 6^th purchases.

Working notes:

• Calculate the total Cost and units of Goods Available for Sales:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
Beginning balance	60	52	3,120
Add: Purchases
April 7	140	54	7,560
July 16	210	57	11,970
October 6	120	58	6,960
Total Goods available for Sale	530		$29,610

Table 2

• Calculate the units of ending inventory:

$\begin{array}{c}\text{Ending inventory units = Total goods available for sale – sales}\\ \text{=530 Units – 450 Units}\\ \text{= 80 Units}\end{array}$

Conclusion

Therefore, the cost of Ending Inventory in the FIFO is $4,640.

(b)

To determine

Calculate the cost of goods sold using FIFO.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
Beginning balance	60	52	3,120
Add: Purchases
April 7	140	54	7,560
July 16	210	57	11,970
October6 [440- (50+130+200)]	40	58	2,320
Cost of goods sold	450		$24,970

Table 3

Note:

• units are sold.
• As it is FIFO method the earlier purchased items will sell first.
• Hence, the cost of goods sold will be the earlier purchased items.

Conclusion

Therefore, the cost of goods sold in the FIFO Method is $24,970.

(c)

To determine

Calculate the Sales Revenue using FIFO method.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue }=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =450\times \$70\\ =\$31,500\end{array}$ (1)

Conclusion

Therefore, the sales revenue in FIFO method is $31,500.

(d)

To determine

Calculate the gross profit using FIFO method.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount ($)
Sales	31,500(1)
Less: Cost of Goods Sold (Refer to table 4)	($24,970)
Gross Margin	6,530

Table 4

Conclusion

Therefore, the amount of Gross margin in FIFO method is $6,530.

2. a)

To determine

Calculate the ending inventory using LIFO method.

Explanation of Solution

Perpetual Inventory System:

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Last-in-Last-Out:

In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.

• Calculate the cost of ending inventory.

Calculation of Cost of Ending Inventory
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning inventory on January 1	60	52	3,120
Purchase on April 7	20	54	1,080
Ending Inventory	80		$4,200

Table 5

Note:

• The ending inventory is 80 units (Refer to Table 2).
• In LIFO method the ending inventory comprises of the inventory purchased first, because the inventory purchased last were sold first.
• Therefore, the ending inventory of 80 units is from the beginning inventory.

Conclusion

Therefore, the cost of Ending Inventory in the LIFO method is $4,200.

(b)

To determine

Calculate the cost of goods sold using LIFO method.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Determine the cost of goods sold:

Particulars	Number of units	Rate per unit ($)	Total cost ($)
October 6	120	58	6,960
July 16	210	57	11,970
April 7	120	54	6,480
Cost of goods sold	440		$25,410

Table 6

Note:

• units are sold.
• As it is LIFO method the recent purchased items will sell first.
• Hence, the cost of goods sold will be the recent purchased items.

Conclusion

Therefore, the Cost of Goods Sold in the LIFO Method is $25,410.

(c)

To determine

Calculate the Sales Revenue using LIFO method.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue }=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =450\times \$70\\ =\$31,500\end{array}$ (2)

Conclusion

Therefore, the sales revenue in LIFO method is $31,500.

(d)

To determine

Calculate the gross profit using LIFO method.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount  ($)
Sales	31,500(2)
Less: Cost of Goods Sold (Refer to table 8)	($25,410)
Gross Margin	6,090

Table 7

Conclusion

Therefore, the amount of Gross margin in LIFO method is $6,090.

3. a)

To determine

Calculate the ending inventory using Weighted-average method.

Explanation of Solution

Perpetual Inventory System:

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

Weighted-average cost method:

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

• Calculate the cost of ending inventory:

$\begin{array}{c}\text{Cost of Ending inventory}=\left(\begin{array}{l}\text{Number of units in Ending inventory}\\ \times \text{Weighted-average cost per unit (3)}\end{array}\right)\\ =80\text{ units }\times \text{ \$55}\text{.8679}\\ =\text{\$4,469}\end{array}$

(4)

Working note:

• Calculate the Weighted-average cost:

$\begin{array}{c}\begin{array}{l}\text{Weighted-average}\\ \text{Cost}\end{array}\}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$29,610}{\text{530 Units}}\\ =\$55.8679\end{array}$

(3)

Conclusion

Therefore, the cost of Ending Inventory in the Weighted-average-cost Method is $4,469.

(b)

To determine

Calculate the cost of goods sold using weighted-average method.

Explanation of Solution

Cost of goods sold:

Cost of goods sold is the accumulate total of all direct cost incurred in manufacturing the goods or the products which has been sold during a period. Cost of goods sold involves direct material, direct labor, and manufacturing overheads.

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of Goods Sold=}\left(\begin{array}{l}\text{Number of units Sold ×Weighted}\\ \text{average cost per unit (3)}\end{array}\right)\\ \text{=}450\text{ units×\$55}\text{.8679}\\ \text{=\$25,141}\end{array}$

(5)

Conclusion

Therefore, the Cost of goods sold in the Weighted-average-cost Method is $25,141.

(c)

To determine

Calculate the Sales Revenue using weighted-average method.

Explanation of Solution

Determine the amount of sales revenue:

$\begin{array}{c}\text{Sales Revenue}=\text{Number of Units Sold }\times \text{ Sales Price Per Unit}\\ =450\text{ units}\times \$70\\ =\$31,500\end{array}$

(7)

Conclusion

Therefore, the sales revenue in Weighted-average-cost Method is $31,500.

(d)

To determine

Calculate the gross profit using weighted-average method.

Explanation of Solution

Gross profit is the difference between the sales and the cost of goods sold.

Calculate the gross profit:

Calculation of Gross Margin
Details	Amount  ($)
Sales	31,500(7)
Less: Cost of Goods Sold	(25,141) (5)
Gross Margin	$6,359

Table 8

Conclusion

Therefore, the amount of Gross margin in Weighted-average-cost Method is $6,359.

4.

To determine

Ascertain the method that will result in higher profitability when inventory costs are declining.

Explanation of Solution

Compare the profitability in the three methods:

Methods	FIFO	LIFO	WA
Gross Margin	$6,530	$6,090	6,359

Table 9

Conclusion

The gross margin computed by using the FIFO method results higher profitability when inventory costs are rising in comparison to the other two methods.