Question

Mel's Hair Salon uses a perpetual inventory system, recorded the following inventory transactions for this year:

                                                                      Purchases            Sales   

                                                            Units           Unit Cost             Units           Selling Price/Unit

Apr       1      Beginning inventory         90                 $ 16

          25      Purchase                       300                    18

May      4      Purchase                       130                    20

           16      Sale                                                                               240                   $32

Jun       4      Purchase                       100                    24

Instructions

(a)   Using the FIFO cost formula, calculate the cost of goods sold for the quarter ended June 30. Show calculations.

(b)   Using the average cost formula, calculate the ending inventory at June 30. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Answer 1

Solution: (a) FIFO method assumes that inventory purchased first will be sold first.

240 units sold on May 16 consists of 90 units of beginning inventory and 150 units from April 25 purchases.

Cost of goods sold = (90 * $16) + (150 * $18)

= $1,440 + $2,700 = $4,140

(b) Average Cost Method

Perpetual Inventory Record

Date	Purchases			Cost of goods sold			Inventory
	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost	Quantity	Unit Cost	Total Cost
Apr-01							90	$16	$1,440
Apr-25	300	$18	$5,400				90	$16	$1,440
							300	$18	$5,400
							390	$6,840/390 = $17.54	$6,840
May-04	130	$20	$2,600				390	$17.54	$6,840
							130	$20	$2,600
							520	$9,440/520 = $18.15	$9,440
May-16				240	$18.15	$4,357	280	$18.15	$5,083
Jun-04	100	$24	$2,400				280	$18.15	$5,083
							100	$24	$2,400
							380	$7,483/380 = $19.69	$7,483

Ending Inventory = $7,483

_{Please rate positive and comment in case of any doubt. I would be happy to help you further.}