Question

Bramble Company’s record of transactions for the month of April was as follows.

Purchases							Sales
April 1	(balance on hand)		1,080	@	$6.00		April 3		900	@	$10.00
4			2,700	@	6.08		9		2,520	@	10.00
8			1,440	@	6.40		11		1,080	@	11.00
13			2,160	@	6.50		23		2,160	@	11.00
21			1,260	@	6.60		27		1,620	@	12.00
29			900	@	6.79				8,280
			9,540

Calculate average-cost per unit. (Round answer to 2 decimal places)

Assuming that periodic inventory records are kept in units only, compute the inventory at April 30 using LIFO and average-cost.

Assuming that perpetual inventory records are kept in dollars, determine the inventory using (1) FIFO and (2) LIFO.

Compute cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

In an inflationary period, which inventory method-FIFO, LIFO, average-cost-will show the highest net income?

Answer 1

A) calculating average cost per unit

Total cost = (1080*6)+(2700*6.08)+(1440*6.4)+(2160*6.5)+(1260*6.6)+(900*6.79) = 60,579

Total units = 9540 (given)

average cost = total cost / total units

= 60,579 / 9540

= 6.35

B) Assuming periodic inventory records are kept in units only, computing the inventory and average cost as on April 30 using LIFO method.

Date Purchase unit @rate. Date Sales units Balance @rate

Ap 1. 1080 @ $6 Ap 3. 900. 180 @ $6
Ap 4. 2700 @ $6.08 Ap 9. 2520. 180 @ $ 6.08
Ap 8. 1440 @ $6.40. Ap 11. 1080. 360@ $ 6.40
Ap13. 2160 @ $6.50. Ap 23. 2160. 0
Ap21. 1260 @ $6.60. Ap 27. 1620. -360
*( which will be consumed from Ap.11 balance )
Ap29. 900 @ 6.79. 900 @ 6.79

average cost = total cost / total units
  
= ((180*6)+(180*6.08)+(900*6.79))/(900+180+180)
= 6.57

C) Assuming periodic inventory records are kept in dollars, computing the inventory as on April 30 using FIFO method.

Date Purchase unit @rate. Date Sales units Balance @rate

Ap 1. 1080 @ $6 Ap 3. 900. 180 @ $6
Ap 4. 2700 @ $6.08 Ap 9. 2520. 360 @ $ 6.08. (2520-180-2700)
Ap 8. 1440 @ $6.40. Ap 11. 1080. 720@ $ 6.40. (1080-360-1440)
Ap13. 2160 @ $6.50. Ap 23. 2160. 720@ $ 6.5. (2160-720-2160)
Ap21. 1260 @ $6.60. Ap 27. 1620. 360 @ $ 6.6. (1620-720-1260)
Ap29. 900 @ 6.79. 900 @ 6.79

Therefore,

Total inventory values = (360*6.6)+(900*6.79)
= $8,487

Assuming periodic inventory records are kept in dollars, computing the inventory as on April 30 using LIFO method.

Date Purchase unit @rate. Date Sales units Balance @rate

Ap 1. 1080 @ $6 Ap 3. 900. 180 @ $6
Ap 4. 2700 @ $6.08 Ap 9. 2520. 180 @ $ 6.08
Ap 8. 1440 @ $6.40. Ap 11. 1080. 360@ $ 6.40
Ap13. 2160 @ $6.50. Ap 23. 2160. 0
Ap21. 1260 @ $6.60. Ap 27. 1620. -360
*( which will be consumed from Ap.11 balance )
Ap29. 900 @ 6.79. 900 @ 6.79

Therefore,

Total inventory values = (180*6)+(900*6.79)+(180*6.08)
= $8285.4

D) Computing cost of goods sold assuming periodic inventory procedures and inventory priced at FIFO.

Date Purchase unit @rate. Date Sales units Balance @rate

Ap 1. 1080 @ $6 Ap 3. 900. 180 @ $6
Ap 4. 2700 @ $6.08 Ap 9. 2520. 360 @ $ 6.08. (2520-180-2700)
Ap 8. 1440 @ $6.40. Ap 11. 1080. 720@ $ 6.40. (1080-360-1440)
Ap13. 2160 @ $6.50. Ap 23. 2160. 720@ $ 6.5. (2160-720-2160)
Ap21. 1260 @ $6.60. Ap 27. 1620. 360 @ $ 6.6. (1620-720-1260)
Ap29. 900 @ 6.79. 900 @ 6.79

Cost of good sold = (1080*6)+(2700*6.08)+(1440*6.40)+(2160*6.50)+(900*6.60)
= $ 52,092

E) In an inflationary period, which inventory method – FIFO, LIFO, average cost method will show the highest net income.

As per FIFO

Date Purchase unit @rate. Date Sales units. Selling price. Sales

Ap 1. 1080 @ $6 Ap 3. 900. 10. 9000
Ap 4. 2700 @ $6.08 Ap 9. 2520. 10. 25200
Ap 8. 1440 @ $6.40. Ap 11. 1080. 11. 11880   
Ap13. 2160 @ $6.50. Ap 23. 2160. 11. 23760
Ap21. 1260 @ $6.60. Ap 27. 1620. 12. 19440   
Ap29. 900 @ 6.79.   

Net income = 89280 – 38382.08
= 50897.92

As per LIFO

Date Purchase unit @rate. Date Sales units. Selling price. Sales

Ap 1. 1080 @ $6 Ap 3. 900. 10. 9000
Ap 4. 2700 @ $6.08 Ap 9. 2520. 10. 25200
Ap 8. 1440 @ $6.40. Ap 11. 1080. 11. 11880   
Ap13. 2160 @ $6.50. Ap 23. 2160. 11. 23760
Ap21. 1260 @ $6.60. Ap 27. 1620. 12. 19440   
Ap29. 900 @ 6.79.   

Net income = 89280 – 52293.6
= 36986.4

As per average cost method

Date Purchase unit @rate. Date Sales units. Selling price. Sales

Ap 1. 1080 @ $6 Ap 3. 900. 10. 9000
Ap 4. 2700 @ $6.08 Ap 9. 2520. 10. 25200
Ap 8. 1440 @ $6.40. Ap 11. 1080. 11. 11880   
Ap13. 2160 @ $6.50. Ap 23. 2160. 11. 23760
Ap21. 1260 @ $6.60. Ap 27. 1620. 12. 19440   
Ap29. 900 @ 6.79.   

Average cost of purchase = 6.35
Average selling price = 10.78

Units sold = 8280

Therefore,

Net income = 89280 – 52578
= 36702

Thus FIFO method should be adopted based on highest net income.