Question

Inventory by Three Methods

The units of an item available for sale during the year were as follows:

Jan.1	Inventory	25 units at $400 per unit
Feb. 19	Purchase	56 units at $460 per unit
June 8	Purchase	60 units at $540 per unit
Oct. 7	Purchase	56 units at $550 per unit

There are 47 units of the item in the physical inventory at December 31. The periodic inventory system is used.

Determine the inventory cost under each of the following methods.

a. Determine the inventory cost by the first-in, first-out method.
$

b. Determine the inventory cost by the last-in, first-out method.
$

c. Determine the inventory cost by the average cost method. Do not round intermediate calculation and round final answer to the nearest whole value.
$

Answer 1

1. FIFO method.

Date	Purchases	Cost of goods sold	Balance
Jan 1	Beginning = 25 units x $ 400 =$ 10,000		25 units x $ 400 = $ 10,000
Feb 19	56 units x $ 460 = $ 25,760		25 units x $ 400 = $ 10,000 56 units x $ 460 = $ 25,760
Jun 8	60 units x $ 540 = $ 32,400		25 units x $ 400 = $ 10,000 56 units x $ 460 = $ 25,760 60 units x $ 540 = $ 32,400
Oct 17	56 units x $ 550 = $ 30,800		25 units x $ 400 = $ 10,000 56 units x $ 460 = $ 25,760 60 units x $ 540 = $ 32,400 56 units x $ 550 = $ 30,800
Dec 31		25 units x $ 400 = $ 10,000 56 units x $ 460 = $ 25,760 60 units x $ 540 = $ 32,400 9 units x $ 550 = $ 4,950	47 units x $ 550 = $ 25,850

Ending inventory = $ 25,850.

2. LIFO method.

Under this method, it assumes that last purchased items are sold out first. So the ending inventory consists of first available or purchased units.

In this case total units available for sale is 197 units out of which 47 units are ending inventory. In this case 47 units consists of 25 units from beginning inventory, balance 22 units from first purchase made.

Ending inventory = (25 units x $ 400)+(22 units x $ 460)

Ending inventory = $ 20,120.

3. Average cost.

Under this method, average cost per unit is multiplied with number of ending units to get ending inventory value.

Average cost per unit = total cost of goods available for sale/total units available for sale.

Total cost of goods available for sale = (25 units x $ 400) + ( 56 units x $ 460) + ( 60 units x $ 540) + ( 56 units x $ 550)

Total cost of goods available for sale = $ 98,960.

Total units available for sale = 197 units.

Average cost per unit = 98,960/197

Average cost per unit = $ 502.335

Ending inventory = 47 units x $ 502.335

Ending inventory = $ 23,610.

SUMMARY:

1. Ending inventory = $ 25,850

2. Ending inventory = $ 20,120

3. Ending inventory = $ 23,610