Question

Your company manufactures plastic pails and uses raw liquid plastic in bulk form (which it stores in a single large tank) to make the pails. On December 31, 2019 the tank held 590 gallons of liquid plastic valued at $18,000. On January 28, 2020 it bought 10,000 gallons of raw liquid plastic for $300,000, and on September 12, 2020 it bought a further 12,000 gallons for $408,000. Note: all of these 2020 deliveries were stored in the aforementioned tank, and the company uses average costs to value inventory. On December 31st, 2020 there remained 19,000 gallons of raw liquid plastic left over in the tank. Given the above information what is the cost of raw liquid plastic that should be charged to the 2020 (Jan to Dec) Income Statement?

a. $392.508
b. $115,376
c. $392,000
d. $436,630

Answer 1

The cost of raw liquid plastic that should be charged to the 2020 Income Statement is $610,470.

Step-by-step explanation:

To calculate the cost of raw liquid plastic that should be charged to the 2020 Income Statement, we need to determine the average cost of the liquid plastic. We start with the opening inventory of 590 gallons valued at $18,000. Then we add the purchases made during the year: 10,000 gallons costing $300,000 and 12,000 gallons costing $408,000. The total gallons purchased is 10,000 + 12,000 + 590 = 22,590 gallons. The total cost is $18,000 + $300,000 + $408,000 = $726,000. Therefore, the average cost is $726,000 / 22,590 = $32.13 per gallon. Finally, we multiply the average cost per gallon by the ending inventory of 19,000 gallons: $32.13 x 19,000 = $610,470. The cost of raw liquid plastic that should be charged to the 2020 Income Statement is therefore $610,470.