To calculate the cost of sales for 2022 using the FIFO method, we need to determine the cost of the units sold throughout the year.
1. Opening inventory on 01 January 2022:
Units: 10,000
Cost per unit: R11
Total cost of opening inventory: 10,000 units * R11 per unit = R110,000
2. Purchases during 2022:
Units purchased: 200,000
Cost per unit: R11 (10% more than the cost per unit of the opening inventory)
Total cost of purchases: 200,000 units * R11 per unit = R2,200,000
3. Ending inventory on 31 December 2022:
Units: 25,000
Cost per unit: To be determined
To calculate the cost of sales, we need to determine the number of units sold during the year. This can be calculated by subtracting the ending inventory from the sum of the opening inventory and purchases:
Units sold = Opening inventory + Purchases - Ending inventory
Units sold = 10,000 + 200,000 - 25,000 = 185,000
Now, let's calculate the cost of sales using the FIFO method:
Cost of sales = Units sold * Cost per unit
Cost of sales = 185,000 units * Cost per unit
To determine the cost per unit, we know that the cost price of Product B is estimated to be 10% more than the cost per unit of the opening inventory. Therefore, the cost per unit of the opening inventory can be calculated as:
Cost per unit of opening inventory = R11 / (1 + 10%) = R11 / 1.10 = R10
Substituting this value into the cost of sales equation:
Cost of sales = 185,000 units * R10 per unit = R1,850,000
Therefore, the cost of sales for 2022 using the FIFO method is R1,850,000.