Question

As an accountant for Lee Company, your supervisor gave you the following calculations of the gross profit for the first quarter:

Alternative           Sales ($50 per unit)                  Cost of goods sold                      Gross Profit

    A                       $500,000                                 $200,000                                    $300,000

    B                       $500,000                                  228,000                                     272,000

    C                        500,000                                  213,333                                      286,667

The three alternative cost flow assumptions are FIFO, average, and LIFO (the alternatives are not necessarily presented in this sequence). Lee uses the periodic inventory system. The computation of the cost of goods sold under each alternative is based on the following:

                                                 Units                   Cost/Unit

Inventory, January 1                    12,000                      $20

Purchase, January 10                   4,000                      21

Purchase, February 15                  6,000                     22

Purchase, March 10                      8,000                     23

Required: Prepare schedules computing the ending inventory (in units and dollars) and proving the cost of goods sold shown here under each of the three alternatives.

Answer 1

Sales = $500,000
Sales units = $500,000 / $50 = 10000 units

	Units	Cost per unit	Total Cost
Inventory, January 1	12000	$         20	$      2,40,000
Purchase, January 10	4000	$         21	$          84,000
Purchase, February 15	6000	$         22	$      1,32,000
Purchase, March 10	8000	$         23	$      1,84,000
	30000		$      6,40,000

Ending Inventory Units = 30000 - 10000 = 20000 units

FIFO - Ending Inventory

	Units	Cost per unit	Total Cost
Inventory, January 1	2000	$         20	$          40,000
Purchase, January 10	4000	$         21	$          84,000
Purchase, February 15	6000	$         22	$      1,32,000
Purchase, March 10	8000	$         23	$      1,84,000
	20000		$      4,40,000

Under FIFO sales is made of purchases made earliest, therefore sales of 10000 units is from beginning inventory of 12000 units.
Cost of Goods sold = Total Inventory Cost - Ending Inventory Cost
= $640,000 - $440,000 = $200,000

LIFO- Ending Inventory

	Units	Cost per unit	Total Cost
Inventory, January 1	12000	$         20	$      2,40,000
Purchase, January 10	4000	$         21	$          84,000
Purchase, February 15	4000	$         22	$          88,000
	20000		$      4,12,000

Under LIFO sales is made of purchases made at last, therefore sales of 8000 units is from March 10, Purchase and remaining 2000 units from February 15, Purchase
Cost of Goods sold = Total Inventory Cost - Ending Inventory Cost
= $640,000 - $412,000 = $228,000

Average Cost - Ending Inventory
Average Cost per unit = $640,000 / 30000 = $21.33

Ending Inventory Cost = 20000 x 21.33 = $426,667
Cost of Goods Sold = $640,000 - $426,667 = $213,333