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In: Operations Management

Study the FIFO and LIFO explanations in Chapter 8. 1) Compute ending FIFO inventory and cost of goods sold.

FIFO & LIFO Inventory

Study the FIFO and LIFO explanations in Chapter 8. 1) Compute ending FIFO inventory and cost of goods sold. Assume $90,000 sales; beginning inventory 500 units @$50; purchases of 400 units @$50; 100 units @$65; 400 units @$80. 2) Compute the cost of goods sold percentage of sales. 3) Compute ending LIFO inventory and cost of goods sold, using same assumptions. 4) Compute the cost of goods sold percentage of sales. 5) Comment on the difference in outcomes

Solutions

Expert Solution

FIFO Inventory Calculation: In FIFO (First In, First Out) method, the inventory purchased first is sold first.

Hence, going by this method, $90000 sales of year will be done from beginning inventory followed by inventory purchased first. Assume that one unit is sold @$90.

Hence,

Total Units Sold = $90000/$90 = 1000 units

Now beginning inventory = $50 * 500 units (beginning inventory units) = $25000

Ist Purchase inventory = $50 * 400 units (units purchased first) = $20000

2nd Purchase Inventory = $65 * 100 units (units purchased second time) = $6500

Last Purchase Inventory = $80 * 400 units (units purchased last time) = $32000

Now, In FIFO, Cost of 1000 units sold will be calculated by adding Beginning Inventory, First Purchase and Second Purchase. This total is equal to 1000 units sold.

Hence, Cost of Goods Sold = $25000 + $20000 + $6500 = $51500

Therefore, Cost of Goods Sold as percentage of Sales = ($51500/$90000) * 100 = 57.22%

Now, Ending FIFO Inventory = Last Purchase Inventory = $32000

LIFO Inventory Calculation: In LIFO (Last In, First Out) method, the inventory purchased last is sold first.

Hence, going by this method, $90000 sales of year will be done from last inventory purchased followed by second last inventory purchased. Assume that one unit is sold @$90.

Hence,

Total Units Sold = $90000/$90 = 1000 units

Now beginning inventory = $50 * 500 units (beginning inventory units) = $25000

Ist Purchase inventory = $50 * 400 units (units purchased first) = $20000

2nd Purchase Inventory = $65 * 100 units (units purchased second time) = $6500

Last Purchase Inventory = $80 * 400 units (units purchased last time) = $32000

Now, In LIFO, Cost of 1000 units sold will be calculated by adding Last Inventory Purchased, Second Last Inventory Purchased, Third Last Inventory Purchased and 100 units from beginning inventory. These all purchases are equal to 1000 units sold.

Hence, Cost of Goods Sold = $32000 + $6500 + $20000 + $5000 = $63500

Therefore, Cost of Goods Sold as percentage of Sales = ($63500/$90000) * 100 = 70.55%

Now, Ending LIFO Inventory = 400 units from beginning Inventory = $50 * 400 units = $20000

Comment on Differences: Higher Cost of Goods Sold and lower ending inventory in LIFO as compared to FIFO is due to inflation. It reflects increasing purchase price of the units purchased. Because of this inflation in purchase price, LIFO has higher Cost of Goods Sold and FIFO has higher inventory as last purchased units account for inventory in FIFO.

keosha answered 2 years ago
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