Question

Exercise 8-16

You are the vice president of finance of Novak Corporation, a retail company that prepared two different schedules of gross margin for the first quarter ended March 31, 2020. These schedules appear below.

		Sales ($5 per unit)		Cost of Goods Sold		Gross Margin
Schedule 1		$155,700		$143,522		$12,178
Schedule 2		155,700		149,694		6,006

The computation of cost of goods sold in each schedule is based on the following data.

		Units		Cost per Unit		Total Cost
Beginning inventory, January 1		11,250		$4.50		$50,625
Purchase, January 10		9,250		4.60		42,550
Purchase, January 30		7,250		4.70		34,075
Purchase, February 11		10,250		4.80		49,200
Purchase, March 17		12,250		4.90		60,025

Debra King, the president of the corporation, cannot understand how two different gross margins can be computed from the same set of data. As the vice president of finance, you have explained to Ms. King that the two schedules are based on different assumptions concerning the flow of inventory costs, i.e., FIFO and LIFO. Schedules 1 and 2 were not necessarily prepared in this sequence of cost flow assumptions.

Prepare two separate schedules computing cost of goods sold and supporting schedules showing the composition of the ending inventory under both cost flow assumptions.

Novak Corporation Schedules of Cost of Goods Sold For the First Quarter Ended March 31, 2020
		Schedule 1 First-in, First-out		Schedule 2 Last-in, First-out

	$		$

:

:

$

$

Schedules Computing Ending Inventory

First-in, First-out (Schedule 1)
	at	$	=	$
	at	$	=
				$

Last-in, First-out (Schedule 2)
	at	$	=	$
	at	$	=
				$

Answer 1

Answer: Firstly, we have to identify how many units were sold for both the schedule. Total units sold is 31,140 (calculated is based on sale value divided by selling price per unit, $155,700/ 5, data as provided in the question).

Schedules of Cost of Goods Sold
For the First Quarter Ended March 31, 2020

Schedules 1: (Based on First In, First Out)

Total units sold is 31,140.

Please refer to the below working for FIFO for Cost of goods sold for 31,140 units: (Under this method, units purchased first will be used first for the production of 31,140 units)  

	Units	Cost per unit	Total cost
Beginning inventory, January 1	11,250	$4.50	$50,625
Purchase, January 10	9,250	$4.60	$42,550
Purchase, January 30	7,250	$4.70	$34,075
Purchase, February 11	3,390*	$4.80	$16,272

Total

31,140

$143,522

* 3,390 is calcuated as follows: units sold 31,140 - opening investory of 11,250 units - Purchase, January 10 of 9,250 units - Purchase, January 30 of 7,250 units

Schedules 2: (Based on Last In, Last Out)

Total units sold is 31,140.

Please refer to the below working for LIFO for Cost of goods sold for 31,140 units: (Under this method, units purchased last will be used first for the production of 31,140 units)

	Units	Cost per unit	Total cost
Purchase, March 17	12,250	$4.90	$60,025
Purchase, February 11	10,250	$4.80	$49,200
Purchase, January 30	7,250	$4.70	$34,075
Purchase, January 10	1,390*	$4.60	$6,394
Total	31,140		$149,694

* 1,390 is calciuated as follows: units sold 31,140 - Purchase, March 17 of 12,250 units - Purchase, February 11 of 10,250 units - Purchase, January 30 of 7,250 units and the Balance of 1,390 is assumed to be used from the Purchase, January 10.

Schedules Computing Ending Inventory

Schedules 1: (Based on First In, First Out)

	Units	Cost per unit	Total cost
Purchase, February 11	6,860*	$4.80	$32,928
Purchase, March 17	12,250	$4.90	$60,025
Ending inventory as on March 31, 2020	19,110		$92,953

* 6,860 is calcuated as follows: Purchase, February 11 of 10,250 units - units consumed is 3,390 as per first table.

Schedules 2: (Based on Last In, Last Out)

	Units	Cost per unit	Total cost
Purchase, January 10	7,860*	$4.60	$36,156
Beginning inventory, January 1	11,250	$4.50	$50,625
Ending inventory as on March 31, 2020	19,110		$86,781

* 7,860 is calcuated as follows: Purchase, January 10 of 9,250 units - units consumed is 1,390 as per second table.