Question

Hamilton company uses a periodic inventory system, at the end of the annuanl accounting period, December 31,2015, the accounting records provided the following information for product 1:

Unit Unit Cost
Inventory, December 31, 2014 2000 $5
For the year 2015:
Purchase, March 21 6000 4
Purchase, August 1 4000 2
Inventory, December 31, 2015 3000

Required:
Compute ending inventory and cost of goods sold under FIFO, LIFO, and average cost inventory costing methods.

Answer 1

The Hamilton company's ending inventory and cost of goods sold for product 1 are calculated using FIFO, LIFO, and average cost methods. FIFO results in a $6,000 ending inventory with a COGS of $36,000, LIFO leads to a $14,000 ending inventory with a $32,000 COGS, and the average cost method ends with a $10,500 inventory and a COGS of $31,500.

Step-by-step explanation:

Inventory Valuation under FIFO, LIFO, and Average Cost Methods

The Hamilton company needs to calculate the ending inventory and cost of goods sold (COGS) for product 1 using three different inventory valuation methods: FIFO, LIFO, and the average cost method. These calculations will be based on the periodic inventory system data provided for the year 2015.

FIFO (First-In, First-Out)

Under FIFO, the oldest inventory costs are assigned to COGS first. The ending inventory is comprised of the newest purchases:

• Ending inventory: 3,000 units from the August 1 purchase at $2 each = $6,000.
• COGS: (2,000 units at $5) + (6,000 units at $4) + (1,000 units at $2) = $10,000 + $24,000 + $2,000 = $36,000.

LIFO (Last-In, First-Out)

Under LIFO, the newest inventory costs are used first:

• Ending inventory: 2,000 units from the beginning inventory at $5 each and 1,000 units from the March 21 purchase at $4 each = $10,000 + $4,000 = $14,000.
• COGS: (4,000 units at $2) + (6,000 units at $4) = $8,000 + $24,000 = $32,000.

Average Cost Method

The average cost per unit is calculated and applied to both COGS and ending inventory:

Total units purchased = 2,000 + 6,000 + 4,000 = 12,000 units.
Total cost = (2,000 x $5) + (6,000 x $4) + (4,000 x $2) = $10,000 + $24,000 + $8,000 = $42,000.
Average cost per unit = $42,000 / 12,000 units = $3.50 per unit.

• Ending inventory: 3,000 units at $3.50 each = $10,500.
• COGS: (12,000 units - 3,000 units) at $3.50 each = 9,000 units at $3.50 = $31,500.

Answer 2

FIFO : Ending Inventory = $6,000, Cost of Goods Sold = $36,000

LIFO : Ending Inventory = $36,000, Cost of Goods Sold = $28,000

Weighted Average Cost Method : Ending Inventory = $10,500, Cost of Goods Sold = $31,500

Step-by-step explanation:

FIFO

Assumes that the first goods received by business will be the first ones to be delivered to the final customer.

Ending Inventory

Ending Inventory = Units left × Earliest Price

= 3000 units × $2

= $6,000

Cost of goods sold

Cost of goods sold : 2000 units × $5 = $10,000

6000 units × $4 = $24,000

1000 units × $2 = $2,000

Total = $36,000

LIFO

Assumes that the last goods purchased are the first ones to be issued to the final customer.

Ending Inventory

Ending Inventory 2000 units × $5 = $10,000

6000 units × $4 = $24,000

1000 units × $2 = $2,000

Total = $36,000

Cost of goods sold

Cost of goods sold : 4000 units × $2 = $8,000

5000 units × $4 = $20,000

Total = $28,000

Weighted Average Cost Method

The average cost of goods held is recalculated each time a new delivery of goods is received Issues are then priced out at this weighted average cost.

First Calculate the Average Cost

Average Cost = Total Cost / Total Units

= (2000 × $5 + 6000 × $4 + 4000 × $2) / 12,000

= $42,000 / 12,000

= $3.50

Ending Inventory

Ending Inventory = Units left × Average Price

= 3000 units × $3.50

= $10,500

Cost of goods sold

Ending Inventory = Units Sold × Average Price

= 9,000 units × $3.50

= $31,500