In: Accounting
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.
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