Question

A retail firm is examining its inventory costing methods and considering the use of FIFO and Average Cost.

The following transactions occurred in April:

Beginning inventory was 20 units @ $100 each;

Purchased 8 units @ $150 each;

Sold 15 units @ $400 each.

Required:

(a)     Calculate the Cost of Sales for April for each of the two inventory costing methods being considered by the retail firm (GST effects can be ignored).                                                                                                                                                  

FIFO

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AVERAGE COST (round average cost per unit to the nearest whole dollar)

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(b)    Which inventory costing method will give the highest profit for April and why?                  

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(c)     If inventory prices were falling which inventory costing method would produce the highest profit and why?         

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(Total marks for Question 3 = 6 marks)

Answer 1

(a) Cost of Sales :-

FIFO Method:-

In this method the goods first in are need to first out.

Units sold = 15 units

Beginning Inventory = 20 units

All uits sold from Beginning Inventory

Hence Cost of Sales = 15 units * $ 100/unit = $ 1500

Average cost method:-

Unit cost under Average method = {(20*100) + (8 * 150)}/28units = 114.29

Hence Cost of Sales = 15 * 114.29 = $1714.29

(b)

	FIFO	Average
Sale (15 * 400)	6000	6000
(-) Cost of Sales	1500	1714.29
Profit	4500	4285.71

FIFO method gives highest profit due to lower of cost of sales amount.

Beginning Inventory unit price = $100/unit

Purchased goods unit price = $150/unit

In FIFO method, Sold units consists units from Beginning Inventory only

But in Average method, Sold units cosists units from Purchased units also

(C) If Inventory price falls upto below $100/unit then Average Cost method gives highest profit

But if Inventory price falls upto $100/unit only then FIFO method gives highest profit