Question

Happlia Co. imports household appliances. Each model has many variations and each unit has an identification number. Happlia pays all costs for getting the goods from the port to its central warehouse in Des Moines. After repackaging, the goods are consigned to retailers. A retailer makes a sale, simultaneously buys the appliance from Happlia, and pays the balance due within one week.

To alleviate the overstocking of refrigerators at a Minneapolis retailer, some were reshipped to a Kansas City retailer where they were still held in inventory at December 31, 2021. Happlia paid the costs of this reshipment. Happlia uses the specific identification inventory costing method.

Required:
1. In regard to the specific identification inventory costing method:

1. Describe its key elements.

2. Discuss why it is appropriate for Happlia to use this method.

2. a. What general criteria should Happlia use to determine inventory carrying amounts at December 31, 2021?

    b. Give four examples of costs included in these inventory carrying amounts.



3. What costs should be reported in Happlia’s 2021 income statement?

Answer 1

Answer :

1.   

a.

The specific identification method requires each unit to be clearly distinguished from similar units either by description, identification number, location, or other characteristic. Costs are accumulated for specific units and expensed as the units are sold. Thus, the specific identification method results in recognized cost flows being identical to actual physical flows. Ideally, each unit is relatively expensive and the number of units relatively few so that recording costs is not burdensome. Under the specific identification method, if similar items have different costs, cost of goods sold is influenced by the specific units sold.

b.

It is appropriate for Happlia to use the specific identification method because each appliance is expensive, and easily identified by number and description. The specific identification method is feasible because Happlia already maintains records of its units held by individual retailers. Management’s ability to manipulate cost of goods sold is minimized because once the inventory is in the retailer’s hands, Happlia’s management cannot influence the units selected for sale.

2.   

a.

Happlia should include in inventory carrying amounts all necessary and reasonable costs to get an appliance into a useful condition and place for sale. Common (or joint) costs should be allocated to individual units. Such costs exclude the excess costs incurred in transporting refrigerators to Minneapolis and their reshipment to Kansas City. These unit costs should only include normal freight costs from Des Moines to Kansas City. In addition, costs incurred to provide time utility to the goods, that is, ensuring that they are available when required, will also be included in inventory carrying amounts.

b.

Examples of inventoriable costs include the unit invoice price, plus an allocated proportion of the port handling fees, import duties, freight costs to Des Moines and to retailers, insurance costs, repackaging, and warehousing costs.

3.   

The 2021 income statement should report in cost of goods sold all inventory costs related to units sold in 2021, regardless of when cash is received from retailers. Excess freight costs incurred for shipping the refrigerators from Minneapolis to Kansas City should be included in determining operating income.