Question

Plato Company reports the following for the month of June.

Date			Explanation		Units			Unit Cost			Total Cost
June	1		Inventory		225			$5			$1,125
	12		Purchase		375			6			2,250
	23		Purchase		500			7			3,500
	30		Inventory		180

A) Compute the cost of the ending inventory and the cost of good sold under (1) FIFO, (2) LIFO, (3) average cost

B) Which costing method gives the highest ending inventory? the highset cost of goods sold? why?

C) How do the average cost value for ending inventory and cost of goods slid related to ending invetory and cost of goods sold for FIFO AND LIFO

D) Explain why the average cost is not $6

Answer 1

a) Units available for sale = opening inventory + purchases

= 225+375+500 = 1100 units

Units sold = Units available for sale - ending inventory

= 1100 - 180 = 920 units

1) FIFO

COGS	Units	Unit cost	Total cost
Sales from opening inventory	225	$5	$1,125
Sales from 12 june purchase	375	$6	$2,250
Sales from 23 june purchase	320	$7	$2,240
Total COGS	920		$5,615
Ending inventory	180	$7	$1,260

2) LIFO

COGS	Units	Unit cost	Total cost
Sales from 23 june purchase	500	$7	$3,500
Sales from 12 june purchase	375	$6	$2,250
Sales from opening inventory	45	$5	$225
Total COGS	920		$5,975
Ending inventory	180	$5	$900

3) Weighted average cost

	Units	Unit cost	Total cost
opening inventory	225	$5	$1,125
12 june purchase	375	$6	$2,250
23 june purchase	500	$7	$3,500
	1100		$6,875
Weighted average cost	$6.25
COGS	$5,750
Ending inventory	$1,125

b) The highest ending inventory value is that under FIFO and the highest COGS is under LIFO. This is becuase under FIFO, the goods entered first are used first, and the goods left in inventory relates to the last purchase which has the highest unit cost. Similarly for LIFO, the last purchases is used first, resulting in usage of highest unit cost purchases.

c)

	Average cost	FIFO	LIFO
COGS	$5,750	$5,615	$5,975
Ending inventory	$1,125	$1,260	$900

we see that the COGS is lower for FIFO and higher for LIFO as compared to average cost and the ending inventory is higher for FIFO anf lower for LIFO as compared to weighted cost.

d) Average cost is calculated as the total cost of goods available for sales diviided by the total number of units available for sale. The calculation has been shown above in 1c.