Chapter 6, Problem 6.7E

(a) (1)

To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

In First-in-First-Out method, the cost of initial purchased items are sold first. The value of the ending inventory consists the recent purchased items.

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

In Average Cost Method the cost of inventory is priced at the average rate of the goods available for sale. Following is the mathematical representation:

$\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}$

To Compute: The cost of ending inventory and cost of goods sold using FIFO.

Explanation of Solution

Calculate the ending inventory using FIFO method.

Calculation of ending inventory under FIFO Method
Particulars	Units	Unit Cost ($)	Total Cost ($)
	(a)	(b)	[(c) = (a) × (b)]
June 12	30	6	180
June 23	200	7	1,400
Ending inventory	230		1,580

Table (1)

Calculate the cost of goods sold using FIFO method.

FIFO Method
Particulars	Units	Unit Cost ($)	Total Cost ($)
	(a)	(b)	[(c) = (a) × (b)]
Beginning inventory	120	5	600
Add Purchases:
June 12	370	6	2,220
June 23	200	7	1,400
Cost of goods available for sale			4,220
Less: Ending inventory (Table 1)			1,580
Cost of goods sold			2,640

Table (2)

Conclusion

Therefore, the cost of ending inventory, and cost of goods sold under FIFO method is $1,580, and $2,640.

(2)

To determine

To Compute: The cost of ending inventory and cost of goods sold using, LIFO.

Explanation of Solution

Calculate the ending inventory using LIFO method.

Calculation of ending inventory under LIFO Method
Particulars	Units	Unit Cost ($)	Total Cost ($)
	(a)	(b)	[(c) = (a) × (b)]
June 1	120	5	600
June 23	110	6	660
Ending inventory	230		1,260

Table (3)

Calculate the cost of goods sold using LIFO method

LIFO Method
Particulars	Units	Unit Cost ($)	Total Cost ($)
	(a)	(b)	[(c) = (a) × (b)]
Beginning inventory	120	5	600
Add Purchases:
June 12	370	6	2,220
June 23	200	7	1,400
Cost of goods available for sale			4,220
Less: Ending inventory (Table 3)			1,260
Cost of goods sold			2,960

Table (4)

Conclusion

Therefore, the cost of ending inventory, and cost of goods sold under LIFO method is $1,260, and $2,960.

(3)

To determine

To Compute: The cost of ending inventory and cost of goods sold using Average-cost method.

Explanation of Solution

Calculate cost of ending inventory using Average-Cost method.

Ending inventory units = 230

Weighted average unit cost = $6.116 (1)

$\begin{array}{c}\text{Cost of ending inventory}\text{= }\left(\begin{array}{l}\text{Ending inventory units}\times \\ \text{Weighted average unit cost}\end{array}\right)\\ =\left(230\times \$6.116\right)\\ =\$1,406.68\end{array}$

Calculate cost of goods sold using Average-Cost method.

Total units purchased = 460

Weighted average unit cost = $6.116 (1)

$\begin{array}{c}\text{Cost of goods sold = }\left(\begin{array}{l}\text{Total units of purchases}\times \\ \text{Weighted average unit cost}\end{array}\right)\\ =\left(460\times \$6.116\right)\\ =\$2,813.36\end{array}$

Working Notes:

Calculate weighted average unit cost.

Total cost of goods available for sale = $4,220 (Table 5)

Total number of units available for sale = 690 (Table 6)

$\begin{array}{c}\text{Weighted-average unit cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total Number of Units Available For Sale}}\\ =\frac{\$4,220}{690}\\ =\$6.116\end{array}$ (1)

Calculate the total cost of goods available for sale.

Particulars	Units	Unit Cost ($)	Total Cost ($)
	(a)	(b)	[(c) = (a) × (b)]
Beginning inventory	120	5	600
Add Purchases:
June 12	370	6	2,220
June 23	200	7	1,400
Cost of goods available for sale			4,220

Table (5)

Calculate the total number of units available for sale.

Particulars	Units
Beginning inventory	120
Add Purchases:
June 12	370
June 23	200
Number of units available for sale	690

Table (6)

Conclusion

Therefore, the cost of ending inventory, and cost of goods sold under average cost method is $1,406.68, and $2,813.36.

(b)

To determine

The costing method which gives highest inventory, and highest cost of goods sold.

Answer to Problem 6.7E

Details	FIFO ($)	LIFO ($)	Average-Cost ($)
Ending Inventory	1,580 (Highest)	1,260 (Lowest)	1406.68
Cost of Goods Sold	2,640 (Lowest)	2,960 (Highest)	2,813.36

Table (7)

Explanation of Solution

FIFO method gives lowest cost of goods sold and highest closing inventory since cost of goods are lower in the beginning because purchases are at lower rate. LIFO method gives highest cost of goods sold and lowest closing inventory

Conclusion

Therefore, the FIFO method gives the highest ending inventory, and the LIFO method gives the highest cost of goods sold.

 (c)

To determine

To Relate: The average-cost values for ending inventory, and cost of goods sold with ending inventory, and cost of goods for FIFO and LIFO.

Explanation of Solution

Average cost method calculates inventory issues based on average cost. Hence cost of goods sold will be higher than FIFO but lower than LIFO method in case of increasing cost of purchase.

Therefore, the ending inventory will be lower than FIFO and higher than LIFO method.

(d)

To determine

To Explain: The reason for the average cost

Explanation of Solution

The calculated average cost is shown in above computation is $6.116. In general average cost is calculated with the decimal points to get the correct values.