Question

At the beginning of year 2, Arron Company had beginning inventory of 200 units that cost $200 each. During year 2, Arron made two inventory purchases. Purchase one consists of 500 units at a cost of $210. The second purchase consisted of 300 units that cost $220 each. Assuming Benson uses FIFO and sales 800 units of inventory during year 2, calculate the following:

a) cost of goods available for sales
b) cost of goods sold
c) cost of ending inventory

Answer 1

Arron Company's cost of goods available for sale is $211,000, the cost of goods sold using FIFO is $124,000, and the ending inventory is $87,000. FIFO uses the earliest inventory costs to calculate COGS.

Step-by-step explanation:

Under the first-in, first-out (FIFO) method, the cost of goods sold (COGS) is based on the cost of the earliest purchased goods. Let's calculate the cost of goods available for sale, COGS, and ending inventory for Arron Company.

a) Cost of goods available for sale = Beginning Inventory + Purchase 1 + Purchase 2

200 units * $200/unit + 500 units * $210/unit + 300 units * $220/unit = $40,000 + $105,000 + $66,000 = $211,000.

b) To calculate COGS, we take the cost of the oldest items first (200 units at $200) plus as many as needed from the next purchase (600 units sold - 200 units = 400 units from Purchase 1 at $210):

200 units * $200/unit + 400 units * $210/unit = $40,000 + $84,000 = $124,000.

c) The ending inventory includes the remaining items from the most recent purchases. Since 800 units were sold, we have 200 units left from Purchase 1 and all 300 units from Purchase 2:

100 units * $210/unit + 300 units * $220/unit = $21,000 + $66,000 = $87,000.