Question

Windsor, Inc. reports the following for the month of June.

Units Unit Cost Total Cost
June 1 Inventory 556 $6 $ 3,336
12 Purchase 1,112 7 7,784
23 Purchase 834 11 9,174
30 Inventory 278
Required:
1. Compute the cost of the ending inventory and the cost of goods sold under (1) FIFO and (2) LIFO.
2. Which costing method gives the higher ending inventory? Why?
3. Which method results in the higher cost of goods sold? Why?

Answer 1

1. FIFO $3,058 LIFO$1,668

2. $3,058

3. LIFO $18,626 FiFO $17,236

Step-by-step explanation:

Formula:

Cost of Goods Sold = Beginning Inventory + Purchases - Ending Inventory

Answers (1):

Calculation of Cost of ending inventory (FIFO Method): Under FIFO method, the goods are sold on First in first out basis, i.e., the inventory is bought first is issued for sale first. Thus, the ending inventory comprises of latest bought material.

In the given question, Bramble corp. had ending inventory of 278 units. Applying FIFO method, the ending entry is from the 834 units bought on June 23 at $ 11 per unit. Thus, he values of inventory will be:

Value of ending inventory = 278 units x $ 11 per unit

= $ 3,058.

Calculation of Cost of ending inventory (LIFO Method): Under LIFO method, the goods are sold on Last in first out basis, i.e., the latest inventory bought is issued for sale first. Thus, the ending inventory comprises of units which were bought earlier.

In the given question, Bramble corp. had ending inventory of 278 units. Applying LIFO method, the ending entry is from the 556 units bought on June 1 at $ 6 per unit. Thus, he values of inventory will be:

Value of ending inventory = 278 units x $ 6 per unit

= $ 1,668.

Answer (2): Under inflationary conditions, i.e., when the price of goods bought increases on every subsequent purchase, the value of ending inventory under FIFO method is higher vis-a-vis LIFO method. This is because, the cheap inventory which is bought earlier is offered for sale early and the ending inventory comprises of latest purchases at high price,

Conclusion: Since in the given question, the price of goods purchased is increasing on each subsequent purchase, the value of ending inventory will be higher under FIFO method (i.e. $ 3,058 in the given question).

Answer (3): Under inflationary conditions, i.e., when the price of goods bought increases on every subsequent purchase, the value Cost of Goods Sold is higher under LIFO method. This is because, the latest inventory bought is offered for sale first and the ending inventory comprises of goods bought first and its value is less than other methods of valuation.

Conclusion: Since in the given question, the price of goods purchased is increasing on each subsequent purchase, the Cost of Goods Sold will be higher under LIFO method. The value as per the figures given in the question may be calculated as follows:

Formula:

Cost of Goods Sold (LIFO Method) = Beginning Inventory + Purchases - Ending Inventory

= $ 3,336 + ($ 7,784 + $ 9,174) - $ 1,668

= $ 18,626

Cost of Goods Sold (FiFO Method) = Beginning Inventory + Purchases - Ending Inventory

= $ 3,336 + ($ 7,784 + $ 9,174) - $ 3,058

= $ 17,236

Note: It is evident from the perusal of above that Cost of Goods Sold (COGS) is higher is case of LIFO method vis-a-vis FIFO method.

Answer 2

Answer: Please refer to the explanation section

Step-by-step explanation:

1 June Inventory Balance = 556 x $6 = $3336

12 June Purchase = 1112 x $7 = $7784

23 Purchase = 834 x $11 = $9174

1.Cost of Ending inventory (First in First Out Method)

First in First out method implies that inventory purchased first will be sold first., with this in mind, We Can conclude ending inventory units of 278 come from the inventory purchased on the 23rd of June.

Ending inventory units = 278 x $11 = $3058

Cost of good sold

Cost of goods sold = $3336 + $7784 + $6116*

Cost of goods sold = $17236

* (834 - 278 x $11)= 556 x $11 = $6116

Cost of Ending inventory Last In First Out

Last In First Out method implies that most recently purchased inventory will be sold first therefore We can conclude that the ending inventory units come from opening inventory units

Ending Inventory = 278 x $6 = $1668

Cost of goods sold = $9174 + $7784 + $1668*

Cost of goods sold = $18626

*(556 - 278) x $6 = 278 x $6 = $1668

2 FIFO Method gives a higher a higher ending inventory Balance ($3058) than LIFO Method ($1668). Ending inventory unit cost under FIFO Method is $11 while the ending inventory unit cost under LIFO Method is $6

3. LIFO Method Provides Higher Cost of goods sold ($18626) than FIFO Method ($17236). LIFO Method includes the entire units of inventory purchased on the 23 June costing $11 per unit while Cost of goods sold under FIFO Method has only 556 units from the units purchase on the 23rd of June costing $11 per unit