Question

E5.7 Calculate inventory and cost of sales using FIFO, LIFO and average cost. 

Fenning Pty Ltd reports the following for the month of June: 

Required 

a. Calculate cost of the ending inventory and the cost of sales under (1) FIFO, (2) LIFO and (3) average cost 

b. Which costing method gives the highest ending inventory and the highest cost of sales? Why? 

c. How do the average cost values for ending inventory and cost of sales compare with ending inventory and cost of sales for FIFO and LIFO?

d. Explain why the average cost is not $12.  

Answer 1

a)

1. FIFO

Beginning Inventory (200* $10) = $2,000

Purchases i) June 12 (300*$12) = $3,600

ii) June 23 (500*$14) = $7,000

Less: Closing Stock (180*$14) = $2520

Cost of Sales = $10,080

2. LIFO

Beginning Inventory (200* $10) = $2,000

Purchases i) June 12 (300*$12) = $3,600

ii) June 23 (500*$14) = $7,000

Less: Closing Stock (180*$10) = $1800

Cost of Sales = $10,800

3. Average Cost

Beginning Inventory (200* $10) = $2,000

Purchases i) June 12 (300*$12) = $3,600

ii) June 23 (500*$14) = $7,000

Less: Closing Stock 180(($2,000+$3,600+$7,000)/ (200+300+500)) = $2,268

Cost of Sales = $10,332

b) FIFO method is giving highest ending inventory,i.e $2,520 as it takes last purchases as unsold stock and in this situation it is highest rate of $14 per piece. Highest cost of sales is in LIFO method as it considers last purchases sold first, and last purchases were purchased at high rate as compared to the beginning stock.

c). Average cost values for closing inventory is $12.6 per unit as compared to fifo which is $14 and Lifo is $10.

Average cost of sales = $2,000+$3,600+$7,000-$2,268 = $10,332

d.) Average cost is $12.6 instead of $12. It should be average of all the stock purchased.

it should be( (200*$10) +(300*12) + (500*14) )/1000 = $12.6