Question

DO IT! 6.2 (LO 2) The accounting records of Americo Electronics show the following data.

Compute cost of goods sold under different cost flow methods.

Beginning inventory		3,000 units at $5
Purchases		8,000 units at $7
Sales		9,400 units at $10

Determine cost of goods sold during the period under a periodic inventory system using (a) the FIFO method, (b) the LIFO method, and (c) the average-cost method. (Round unit cost to nearest tenth of a cent.)

Answer 1

Solution :

a.If the firm sold 9,400 units, the cost of goods sold as per FIFO method :

As per the First In First Out (FIFO) Method of Inventory Accounting, the units produced earliest i.e., those that are a part of the beginning inventory are assumed to be sold first.

Thus 3,000 units that are available from the earliest date i.e., those that are a part of the beginning Inventory, are to be included in the cost of goods sold first The balance number of units ( 9400 – 3000 ) shall be taken from the new units purchased.

Thus cost of goods sold, as per FIFO method = ( 3,000 * $ 5 ) + ( ( 9,400 – 3,000 ) * 7 )

= $ 15,000 + ( 6,400 * $ 7 )

= $ 15,000 + $ 44,800

= $ 59,800

Therefore the cost of goods sold of the 9,400 units sold, as per FIFO method= $ 59,800

b.If the firm sold 9,400 units, the cost of goods sold as per LIFO Method:

As per the Last In First Out (LIFO) Method of Inventory Accounting, the latest units produced or purchased are assumed to be sold first.

Thus the 8,000 units that are purchased most recently shall be included in the cost of goods sold first. The balance number of units ( 9400 – 8000 ) shall be from the beginning Inventory.

Thus cost of goods sold, as per LIFO method = ( 8,000 * $ 7 ) + ( (9,400 – 8,000 ) * $ 5 )

= $ 56,000 + ( 1,400 * $ 5 )

= $ 56,000 + $ 7,000 = $ 63,000

Therefore the cost of goods sold of the 9,400 units sold, as per LIFO method = $ 63,000

c. If the firm sold 9,400 units, the cost of goods sold as per the average cost method :

The formula for calculating weighted average cost per unit of Inventory is

= Total value of Inventory / Total number of units of Inventory

= [ ( Beginning Inventory units* Cost per unit of beginning Inventory ) + ( units purchased* purchase cost per unit ) ] / (Beginning Inventory units + units purchased )

As per the information given in the question we have

Beginning Inventory units = 3,000 ; Cost per unit of beginning Inventory = $ 5 ;   Units purchased = 8,000   ; purchase cost per unit = $ 7

Applying the above information in the formula we have

= [ ( 3,000 * $ 5 ) + ( 8,000 * $ 7 ) ] / ( 3,000 + 8,000 )

= ( $ 15,000 + $ 56,000 ) / 11,000

= $ 71,000 / 11,000

= $ 6.4545

= $ 6.5 ( when rounded off to nearest tenth of a cent )

Thus the weighted average cost per unit = $ 6.5

Thus we have the cost of goods sold as per the average cost method = Sales units * Weighted average cost per unit

= 9,400 * $ 6.5

= $ 61,100

Thus the cost of goods sold during the period as per the average cost method = $ 61,100