Question

The following information is taken from the records of West End Distributors Inc. for the month ended May 31.

				Units		Unit cost
May 1 6 12 19 29		Purchase #1 Purchase #2 Purchase #3 Purchase #4 Purchase #5		100 200 125 350 150		$1 1 2 2 3

At May 31, 200 units remain unsold. For specific identification purposes, items on hand at May 31 were:

100 units of purchase #1

100 units of purchase #4

The other units were sold on May 31 for $2 each.

Required:

1.		Calculate the cost of ending inventory under each of the following costing methods:
	a.	FIFO
	b.	Specific identification
	c.	Weighted average
2.		Complete the following calculations:
			FIFO	Spec. Ident.	Weighted Average
		Sales
		Cost of goods sold
		Gross Profit
3.		One of the company’s strategies is to minimize income taxes and its accounting policies will reflect this. Which inventory cost method should they adopt and why?

Answer 1

1) (a) FIFO:

          Total units=925

          Units sold=725

          closing stock=200

          Cost=(50*2)+(150*3)=550

(b) Specific identification=

            (100*1)+(100*2)=300

(c) Weighted average=

               unit cost=(300*1)+(475*2)+(150*3)/925=1.8378

               closing stock=200*1.8378= 367.56

2)                                  FIFO             Specification identification           weighted avg

                 Sales           1450                  1450                                         1450

                 COGS          1150                   1400                                        1332.41

             Gross Profit      300                      50                                            117.59

3) To minimise income tax, specific identification method is need to be adopted as the gross profit is low in this method.