Chapter 8, Problem 8.5P

Various inventory costing methods

• LO8–1, LO8–4

Ferris Company began 2018 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2018 are as follows:

Sales
Date of Sale	Units
Jan. 5	3,000
Jan. 12	2,000
Jan. 20	4,000
Total	9,000

8,000 units were on hand at the end of the month.

Required:

Calculate January’s ending inventory and cost of goods sold for the month using each of the following alternatives:

1. FIFO, periodic system

2. LIFO, periodic system

3. LIFO, perpetual system

4. Average cost, periodic system

5. Average cost, perpetual system

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.

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.

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 Weighted-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 ending inventory and cost of goods sold for the month of January under FIFO.

Explanation of Solution

Calculate the total cost and units of goods available for sales.

Table (1)

Calculate the cost of ending inventory under FIFO, periodic system.

Calculation of Cost of Ending Inventory (FIFO)
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
January 18	6,000	10	60,000
January 10	2,000	9	18,000
Ending Inventory	8,000		78,000

Table (2)

Working note:

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$153,000 }-\$78,000\\ =\$75,000\end{array}$

Therefore, the cost of goods sold in the FIFO method is $78,000.

To determine

To Compute: The ending inventory and cost of goods sold for the month of January under LIFO.

Explanation of Solution

Calculate the cost of ending inventory under LIFO, periodic system.

Calculation of Cost of Ending Inventory (LIFO)
Details	Number of Units	Rate per Unit ($)	Total Cost ($)
Beginning Balance	6,000	8	48,000
January 10	2,000	9	18,000
Ending Inventory	8,000		66,000

Table (3)

Therefore, the cost of ending inventory in the LIFO method is $66,000.

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\text{\$153,000 }-\$66,000\\ =\$87,000\end{array}$

Therefore, the cost of goods sold in the LIFO method is $87,000.

To determine

To Compute: The ending inventory and cost of goods sold for the month of January under LIFO perpetual system.

Explanation of Solution

Calculate the cost of ending inventory under LIFO, perpetual system.

Table (4)

Therefore, the cost of ending merchandised inventory and cost of goods sold are $71,000 and $82,000 respectively.

To determine

To Compute: The ending inventory and cost of goods sold for the month of January under average cost periodic system.

Explanation of Solution

Calculate the cost of ending inventory under average cost, periodic system.

Number of units in ending inventory = 8,000

Weighted average cost per unit = $9 (1)

$\begin{array}{c}\text{Cost of Ending inventory = }\left(\begin{array}{l}\text{Number of units in Ending inventory }\\ \times \text{ Weighted-average cost per unit}\end{array}\right)\\ =8,000\text{ units }\times \$9.00\\ \text{=}\text{\$72,000}\end{array}$

Working Note:

Calculate the Weighted-average cost.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\text{Total Cost of Goods Available For Sale}}{\text{Total number of units Available for Sale}}\\ =\frac{\$153,000}{17,000\text{ Units}}\\ =\$9.00\end{array}$ (1)

Therefore, the cost of ending inventory in the Average-cost method is $72,000.

Calculate the Cost of Goods Sold.

$\begin{array}{c}\text{Cost of goods sold = Goods available for sale }-\text{ Ending inventory}\\ \text{=}\$153,000-\$72,000\\ =\$81,000\end{array}$

Therefore, the cost of goods sold in the Average-cost method is $81,000.

To determine

To Compute: The ending inventory and cost of goods sold for the month of January under average cost perpetual system.

Explanation of Solution

Calculate the cost of ending inventory under average cost, perpetual system.

Table (5)

Working Notes:

Calculate the Weighted-average cost after the January 10^th purchase.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\left(\begin{array}{l}\text{Total Cost of Goods Available For Sale }\\ \text{after the purchase of January 10}\end{array}\right)}{\text{Total number of units Available for Sale}}\\ =\frac{\$69,000}{\text{8,000 Units}}\\ =\$8.625\end{array}$ (2)

Calculate the Weighted-average cost after the January 18^th purchase.

$\begin{array}{c}\text{Weighted-average Cost}=\frac{\left(\begin{array}{l}\text{Total Cost of Goods Available For Sale }\\ \text{after the purchase of January 18}\end{array}\right)}{\text{Total number of units Available for Sale}}\\ =\frac{\$111,750}{\text{12,000 Units}}\\ =\$9.3125\end{array}$ (3)

Therefore, the cost of ending merchandised inventory and cost of goods sold are 74,500 and $78,500 respectively.