Question

This company uses a perpetual inventory system. It had the following beginning inventory and current year purchases of its product.

Jan 1. Beginning Inventory ..... 50 units @ $100 = $5,000

Jan 14. Purchase .......................150 units @ $120 = 18,000

Apr 30. Purchase........................ 200 units @ $150= 30,000

Sept 26th. Purchase................... 300 units @ $200= 60,000

The company transacted sales on the following dates at $350 per unit sales price.

Jan 10. 30 units (specific cost: 30 @ $100)

Feb 15. 100 units (specific cost: 100 @ $120)

Oct 5. 350 units (specific cost: 100 @ $150 and 250 @ $200)

USING (THE WEIGHTED AVERAGE COSTING METHOD) ANSWER THE FOLLOWING QUESTIONS:

A. Identify and compute the costs to assign to the units sold. (Round per unit costs to three decimals.)

B. Identify and compute the costs to assign to the units in ending inventory. (Round inventory balances toe the dollar)

C. How likely is it that the Weighted Average method will reflect the actual physical flow of goods? How relevant is that factor in determining wether this is an acceptable method to use?

D. What is the impact of this method versus others in determining net income and income taxes?

E. How closely does the ending inventory amount reflect replacement cost?

Answer 1

1. Identity and Compute the Costs to assign to the units sold:

The cost of 30 units = 30 x$100 = $3,000 – These units sold from Beginning Inventory

The cost of 100 units sold = 100 units x$120 = $12,000 – These units are sole from the purchase on Jan. 14.

The cost of 350 Units sold = (100 units x$150)+(250 units x$200) = $65,000 – Out of these 350 units, 100 Units are purchased on April 30 and 250 units are purchased on Sept. 26.

2. Identify and compute the costs to assign to the units in ending inventory

Cost of Ending Inventory:     

       From Beginning Inventory     - 20 units x $100 =       $2,000

       From the Purchase on Jan. 14 – 50 units x $120=       $6,000

       From the Purchase on Apr. 30 – 100 units x$150 = $15,000

       From the Purchase on Sept.26-    50 units x $200= $10,000

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                The costs of Ending units (220 units)                  $33,000

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3. Continuous stock – taking will make the storekeeper and the stores accountant more vigilant in their work and they will try to keep their record accurate and up-to-date. A detailed and more reliable check on the stores is obtained.

Factor in determining whether this an acceptable method - This system is comprised of the following three:

a.Bin Cards (i.e., Quantitative perpetual inventory)

b.Stores Ledger (Quantitative valued perpetual inventory)

c.Continuous Stock taking ( i e., Physical Perpetual Inventory)

4. Impact of this method in determining net income and income taxes:

        Closing Inventory Value is taking from Bin Cards or Stores Ledger. So, the     

        closing value reflect the actual cost of the closing inventory.

5. Since the ending inventory shows its qty and its value apparently in the bin card.