Question

Comparison of Inventory Costing Methods—Perpetual System (Appendix)

Bitten Company's inventory records show 600 units on hand on October 1 with a unit cost of $5 each.

The following transactions occurred during the month of October:

Date		Unit Purchases		Unit Sales
October 4				500 @ $10.00
8		800 @ $5.40
9				700 @ $10.00
18		700 @ $5.76
20				800 @ $11.00
29		800 @ $5.90

All expenses other than cost of goods sold amount to $3,000 for the month. The company uses an estimated tax rate of 30% to accrue monthly income taxes.

Required:

1. Prepare a chart comparing cost of goods sold and ending inventory using the perpetual system and the following costing methods. In your calculations round moving average unit cost to three decimal places and round all other calculations and your final answers to the nearest dollar.

Bitten Company
Comparison for Cost of Goods Sold and Ending Inventory Using the Perpetual System
For Moving Average, FIFO and LIFO Cost Methods
	Cost of Goods Sold	Ending Inventory	Total
Moving Average	$	$	$
FIFO
LIFO

2. What does the Total column represent?

3. Prepare income statements for each of the three methods. When required, round your answers to the nearest dollar.

Bitten Company
Income Statement
For the Month of October
	Weighted Average	FIFO	LIFO
	$	$	$
	$	$	$
	$	$	$
	$	$	$

4. Will the company pay more or less tax if it uses FIFO rather than LIFO?

How much more or less?

Answer 1

Part 1)

The cost of goods sold and ending inventory under the perpetual system is calculated as below:

Moving Average:

	Purchases			Sales			Balance
Date	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
10/1							600	5.00	3,000
10/4				500	5.00	2,500	100	5.00	500
10/8	800	5.40	4,320				900	5.356	4,820
10/9				700	5.356	3,749	200	5.356	1,071
10/18	700	5.76	4,032				900	5.67	5,103
10/20				800	5.67	4,536	100	5.67	567
10/29	800	5.90	4,720				900	5.874	5,287
					Cost of Goods Sold	$10,785		Ending Inventory	$5,287

_____

Notes:

The moving average rates are calculated as below:

Rate for 10/9 Sale = (100*5 + 800*5.40)/900 = $5.356

Rate for 10/20 Sale = (200*5.356 + 700*5.76)/900 = $5.67

Rate for 10/29 Balance Inventory = (100*5.67 + 800*5.90)/900 = $5,874

______

FIFO:

	Purchases			Sales			Balance
Date	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
10/1							600	5.00	3,000
10/4				500	5.00	2,500	100	5.00	500
10/8	800	5.40	4,320				100	5.00
							800	5.40	4,820
10/9				100	5.00	500
				600	5.40	3240	200	5.40	1,080
10/18	700	5.76	4,032				200	5.40
							700	5.76	5,112
10/20				200	5.40	1,080
				600	5.76	3,456	100	5.76	576
10/29	800	5.90	4,720				100	5.76
							800	5.90	5,296
					Cost of Goods Sold	$10,776		Ending Inventory	$5,296

______

LIFO:

	Purchases			Sales			Balance
Date	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
10/1							600	5.00	3,000
10/4				500	5.00	2,500	100	5.00	500
10/8	800	5.40	4,320				100	5.00
							800	5.40	4,820
10/9				700	5.40	3,780	100	5.00
							100	5.40	1,040
10/18	700	5.76	4,032				100	5.00
							100	5.40
							700	5.76	5,072
10/20				700	5.76	4,032
				100	5.40	540	100	5.00	500
10/29	800	5.90	4,720				100	5.00
							800	5.90	5,220
					Cost of Goods Sold	$10,852		Ending Inventory	$5,220

______

Tabular Representation:

Bitten Company
Comparison for Cost of Goods Sold and Ending Inventory Using the Perpetual System
For Moving Average, FIFO and LIFO Cost Methods
	Cost of Goods Sold	Ending Inventory	Total
Moving Average	$10,785	$5,287	$16,072
FIFO	$10,776	$5,296	$16,072
LIFO	$10,852	$5,220	$16,072

______

Part 2)

The total column represents the total cost of inventory (beginning) and purchases distributed between the cost of goods sold (which is reported as an expense on the income statement) and ending inventory (which gets reported as an asset in the balance sheet). This total cost is frequently referred to as "Cost of Goods Available for Sale" in accounting.

______

Part 3)

The income statement under each method is prepared as below:

Bitten Company
Income Statement
For the Month of October
	Weighted Average	FIFO	LIFO
Sales	20,800	20,800	20,800
Cost of Goods Sold	10,785	10,776	10,852
Gross Profit	10,015	10,024	9,948
Operating Expense	3,000	3,000	3,000
Income before Taxes	7,015	7,024	6,948
Less Income Tax Expense	2,105	2,107	2,084
Net Income	$4,910	$4,917	$4,864

______

Part 4)

The company will pay more tax if it uses FIFO method

Extra Tax Paid under FIFO = Income Tax Expense under FIFO - Income Tax Expense under LIFO = 2,107 - 2,084 = $23