Question

Alta Ski Company’s inventory records contained the following information regarding its latest ski model. The company uses a periodic inventory system.

Beginning inventory, January 1, 20x1	600 units @ $80 each
Purchases:
January 15	1,000 units @ $95 each
January 21	800 units @ $100 each
Sales:
January 5	400 units @ $120 each
January 22	800 units @ $130 each
January 29	400 units @ $135 each
Ending inventory, January 31, 20x1	800 units

Compute cost of goods sold for January and the ending inventory using both the FIFO,  LIFO, and Weighted Average  methods (perpetual system).

Answer 1

A perpetual inventory system is a method of inventory management that records real-time transactions of received or sold stock through the use of technology generally considered a more efficient method than a periodic inventory system.

Step 1 : Cost of goods sold(COGS) & ending inventory for January under FIFO method :

i) FIFO :- COGS

FIFO is one of the method commonly used to estimate the value of inventory on hand at the end of an accounting period and the cost of goods sold during the period.

This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold.

Therefore,

COGS = number units sold × cost per unit

Number of units sold = total units - ending units

= 2,400 units (600 + 1,000 + 800) - 800 units

= 1,600 units

COGS for 1,600 units (purchased first is sold first) is :

= 600 units × $ 80 + 1,000 units× $95 = $48,000 + $95,000

= $ 1,43,000.

ii)FIFO :- Ending inventory ( purchased latestly will remain in ending inventory)

Ending inventory = ending units × cost per unit

Given ending units = 800 units

Therefore, ending inventory = 800 × $100 = $80,000

Step 2 : Cost of goods sold(COGS) & ending inventory for January under LIFO method :

i) COGS :- LIFO

LIFO is one of the method commonly used to estimate the value of inventory on hand at the end of an accounting period and the cost of goods sold during the period.

This method assumes that newer inventory purchased will be sold and inventory purchased or manufactured first remains as unsold.

COGS = number of units sold (purchased newer is sold first) × cost per unit.

(As we know that Number of units sold = 1600 units)

COGS = 800 units × $100 + 800 units × $95

= $80,000 + $76,000

=$1,56,000

ii) Ending inventory under LIFO :

Ending inventory = Ending units ( purchased firstly will remain in inventory) × cost per unit.

= 600 units × $80 per unit + 200 units × $95 per unit

= $48,000 + $19,000

= $67,000.

Step 3 : Cost of goods sold(COGS) & ending inventory for January under weighted average method :

In accounting, the Weighted Average Cost (WAC) method of inventory valuation uses a weighted average to determine the amount that goes into COGS and inventory. The weighted average cost method divides the cost of goods available for sale by the number of units available for sale.

The formula for the weighted average cost method is as follows:

Weighted average cost per unit (WAC per unit ) = cost of goods availabe for sale ÷ units available for sale

The cost of goods available for sale equals the beginning value of inventory plus the cost of goods purchased.

That implies ,

Cost goods availabe for sale = beginning inventory value + cost of goods purchased

= 600 × $80 + 1,000 × $95 + 800 × $100

= $48,000 + $95,000 + $80,000

= $2,23,000

Units available for sale = beginning units + purchased units

= 600 + 1,000 + 800

= 2,400 units

Therefore

WAC per unit = $2,23,000 ÷ 2,400 units

= $92.92 per unit

= $93 per unit ( rounded off)

i) COGS under weighted average method:-

= Number of units sold × WAC per unit

= 1600 units × $93 per unit

= $ 1,48,800

ii) ending inventory under weighted average method :-

= Ending units × WAC orr unit

= 800 units × $93 per unit

= $74,400.