Question

The purchases and issues of rubber gaskets (Materials Ledger #11216) as shown in the records of Hillsdale Corp. for November follow: Units Unit Price Nov. 1 Beginning balance 30,000 $3.00 4 Received, Rec. Report No. 112 10,000 3.10 5 Issued, Mat. Req. No. 49 30,000 8 Received, Rec. Report No. 113 50,000 3.30 15 Issued, Mat. Req. No. 50 20,000 22 Received, Rec. Report No. 114 25,000 3.50 28 Issued, Mat. Req. No. 51 30,000 Required: 1. Complete a materials ledger account similar to Figure 2-10 (the “On Order” columns should be omitted) for each of the following inventory costing methods, using a perpetual inventory system: a. FIFO b. LIFO c. Weighted average (carrying unit prices to five decimal places) 2. For each method, prepare a schedule that shows the total cost of materials transferred to Work in Process and the cost of the ending inventory. 3. If prices continue to increase, would you favor adopting the FIFO or the LIFO method? Explain. 4. When prices continue to rise, what is the effect of FIFO versus LIFO on the inventory balance for materials reported in the balance sheet? Discuss.

Answer 1

Solution :

Part 1.

Part 2

Particulars	FIFO	LIFO	Weighted Average
Cost of Transfer out	253000	261000	256295
Ending inventory	120500	112500	117205

Part 3

If the price continue to increase, FIFO method will be more effective. In LIFO method cost of goods transfer comes very high compare to FIFO Method and ending inventory will be low as compared to FIFO method. In FIFO method value of ending inventory will be very close to the market price of the material.

Part 4

When price continue to rise, Inventory value in FIFO method will be very close to market price and in LIFO method inventory value will be very low.

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