Question

A company has inventory of 10 units at a cost of $10 each on June 1. On June 3, it purchased 20 units at $12 each. 12 units are sold on June 5. Using the average-cost periodic inventory method, what is the cost of the 12 units that were sold?

Select one:

a.  $136.

b.  $130.

c.  $204.

d.  $340.

Answer 1

Solution :

As per the average-cost periodic inventory method the average cost of unit sold is calculated as follows

= Total cost of inventory / Total number of units in inventory

As per the information given in the question we have

Units in Inventory as on June, 1 = 10 ; Cost of each unit of Inventory as on June, 1 = $ 10 ;

Units purchased on June, 3 = 20 ; Cost of each unit of Inventory purchased on June, 3 = $ 12 ;

Thus the Total cost of Inventory = ( Units in Inventory as on June, 1 * Cost of each unit of Inventory as on June, 1 ) + ( Units purchased on June, 3 * Cost of each unit of Inventory purchased on June, 3 )

= ( 10 * $ 10 ) + ( 20 * $ 12 )

= $ 100 + $ 240

= $ 340

Thus the Total cost of Inventory = $ 340

Total number of units in inventory = Units in Inventory as on June, 1 + Units purchased on June, 3

= 10 + 20 = 30 units

Thus the Total number of units in inventory = 30 units

Therefore the average cost per unit of inventory = $ 340 / 30

= $ 11.333333

The cost of the 12 units that were sold as per the average-cost periodic inventory method =

No. of units sold * average cost per unit of inventory

= 12 * $ 11.333333

= $ 135.999996

= $ 136 ( when rounded off to the nearest dollar )

Thus the cost of the 12 units that were sold as per the average-cost periodic inventory method = $ 136

The solution is option a. = $ 136