Question

P6-2B

The Piano Studio Ltd. has provided you with the following information with respect to its piano inventory for the month of August. The company uses the specific identification cost formula.

Date	Explanation	Supplier	Serial #	Unit Cost/Price
Aug. 1	Beginning inventory	Yamaha	YH6318	$1,800
		Kawai	KG1268	1,800
		Kawai	KG1520	900
		Suzuki	SZ5716	1,400
		Suzuki	SZ5828	1,900
		Steinway	ST8411	2,900
		Steinway	ST0944	2,500
10	Sales	Suzuki	SZ5828	3,000
		Kawai	KG1268	2,100
15	Purchases	Yamaha	YH4418	1,600
		Yamaha	YH5632	1,900
18	Sales	Yamaha	YH4418	2,400
		Steinway	ST8411	4,000
22	Purchases	Suzuki	SZ6132	2,100
		Suzuki	SZ6148	1,900
26	Sales	Suzuki	SZ6132	3,200
		Yamaha	YH6318	2,800
		Yamaha	YH5632	2,900

Instructions

(a) Determine the cost of goods sold and ending inventory for the month of August.

(b) Determine the gross profit for the month of August.

(c) Discuss whether the specific identification cost formula is likely the most appropriate cost determination cost formula for the Piano Studio. Explain why this is, or is not, the case.

Apply perpetual FIFO and average cost; compare effects.

Answer 1

From above table total no. of units sold = 7 units of piano

total units and cost of opening inventory = 7 units and $ 13200

total purchases units and cost during the period = 4 units and 7500

total sales unit and cost during the period = 7 units and 20400

Under specific indentification the following units are left in ending inventory -

Supplier	Serial #	Unit Cost/Price
Kawai	KG1520	900
Suzuki	SZ5716	1,400
Steinway	ST0944	2,500
Suzuki	SZ6148	1,900
Ending Inventory		6700

Calculation of COGS -

TOtal cost of goods sold inventory = Total cost of inventory during the period - cost of Ending inventory

= 20700 - 6700

= 14000

(b) Gross profit = Sales - COGS

= 20400 - 14000

= 6400

(c) Yes it is the most appropriate cost determination cost formula for the piano studio as the piano stock is very much less and does not seem hectic while calculation but in a large store where transaction of sales and purchase is much more there the specific identification cost determination formula could become hectic.

now the Ending cost of inventory, COGS and Gross profit as per average cost -

Opening	Purchase	sales	Closing	Cost of inventory	Avg. cost per unit
7	0	0	7	13200	1885.714
7	0	2	5	9,429	1885.714
5	2	0	7	12,929	1846.939
7	0	2	5	9,235	1846.939
5	2	0	7	13,235	1890.671
7	0	3	4	$7,563	1890.671

COGS = 1885.71*2 + 3693.87*2 + 1890.67*3

= 13137.32

Gross Profit = Sales - COGS

= 20400 - 13137.32

= 7262.68

In applying perpetual FIFO, need to choose random piano from begnning stock so -

Opening	Purchase	sales	Closing	Cost of inventory
7	0	0	7	13200
7	0	2	5	7,800
5	2	0	7	11,300
7	0	2	5	8,000
5	2	0	7	12,000
7	0	3	4	$7,500

Last two purcahses of piano would be left in stock.

COGS = total cost of opening inventory (As all stock was sold due to first in)

= 13200

Gross profit = Sales (20700) - COGS(13200)

= 7500

so in specific identification gross profit is less compare to FIFO and Avg. cost.

In case of any clarification required please comment.