Question

Periodic Inventory by Three Methods; Cost of Merchandise Sold The units of an item available for sale during the year were as follows: Jan. 1 Inventory 1,800 units at $108 Mar. 10 Purchase 2,240 units at $110 Aug. 30 Purchase 2,000 units at $116 Dec. 12 Purchase 1,960 units at $120 There are 2,000 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods. Cost of Merchandise Inventory and Cost of Merchandise Sold Inventory Method Merchandise Inventory Merchandise Sold First-in, first-out (FIFO) $ $ Last-in, first-out (LIFO) Weighted average cost

Answer 1

In inventory cost calculations, FIFO considers the oldest inventory first, LIFO the latest, and Weighted Average Cost takes the average of all available units. Each method affects COGS differently and is used based on specific inventory tracking and financial reporting strategies.

Step-by-step explanation:

When calculating the cost of inventory and the cost of merchandise sold under a periodic inventory system, we use different methods like First-in, first-out (FIFO), Last-in, first-out (LIFO), and Weighted average cost. Each method can result in different costs depending on the prices and timing of purchases.

For FIFO, we sell the oldest inventory first, meaning we'll calculate the cost of goods sold (COGS) based on the earliest prices paid. For LIFO, we sell the newest inventory first, calculating COGS based on the most recent prices. For Weighted average cost, we calculate an average cost per unit by dividing the total cost of goods available for sale by the total units available for sale, and then apply this average cost to the units sold.

Let's apply these methods using the provided inventory data:

1. FIFO - Sum the cost of the oldest units until you reach the number of units sold, and the remaining units for the ending inventory.
2. LIFO - Sum the cost of the newest units first and go backwards until you reach the number of units sold.
3. Weighted Average Cost - Calculate the average cost of all units and multiply it by the number of units sold.

For example, if 5,000 units were sold and we had the following purchases: 2,000 units at $10, 2,000 units at $12, and 1,000 at $15, the FIFO COGS would be (2,000*$10) + (2,000*$12) + (1,000*$15) = $20,000 + $24,000 + $15,000 = $59,000. The LIFO COGS would be (1,000*$15) + (2,000*$12) + (2,000*$10) = $15,000 + $24,000 + $20,000 = $59,000 (notice it's the same in this simplified case where prices don't vary over time).

Answer 2

Step-by-step explanation:

For computing the inventory cost and the cost of merchandise sold by three methods, first we have to find out the average unit price which is shown below:

Average unit price equals to

= Total amounts ÷ Total units

where,

Total amount = 1,800 units × $108 + 2,240 units × $110 + 2,000 units × $116 + 1,960 units × $120

= $194,400 + $246,400 + $232,000 + $235,200

= $908,000

Total units

= 1,800 units + 2,240 units + 2,000 units + 1,960 units

= 8,000 units

So, the average unit price is

= $908,000 ÷ 8,000 units

= $113.50

Now the inventory cost and the cost of merchandise sold by three methods are as follows:

Under the FIFO method

Inventory

= 40 units × $116 + 1,960 units × $120

= $4,640 + $235,200

= $239,840

Cost of goods sold

= $908,000 - $239,840

= $668,160

Under the LIFO method

Inventory

= 1,800 units × $108 + 200 units × $110

= $194,400 + $22,000

= $216,400

Cost of goods sold

= $908,000 - $216,400

= $691,600

Under the weighted average cost

Inventory

= 2,000 × $113.50

= $227,000

Cost of goods sold

= $908,000 - $227,000

= $681,000