Question

The following data are available for one of the products sold by Dahlia Company, which uses a perpetual inventory system: Mar. 1 Beginning inventory, 500 units at $4.00 each 7 Purchased 2,000 units at $5.00 each 12 Sold 2,300 units 17 Purchased 1,800 units at $6.00 each 27 Sold 1,900 units 1. Calculate cost of goods sold for March and the dollar amount of ending inventory on March 31 assuming FIFO is used. 2. Calculate cost of goods sold for March and the dollar amount of ending inventory on March 31 assuming LIFO is used. 3. Calculate cost of goods sold for March and the dollar amount of ending inventory on March 31 assuming average cost is used. (Round average cost per unit to two decimal places. Round other amounts to the nearest dollar.)

Answer 1

perpetual inventory system:

Under this system an expense for inventory sold is recognized along with sale using pre determined cost flow assumption such as FIFO, LIFO or moving average method. Stock of closing inventory is taken after each purchase or sale.

1

FIFO method:

Under FIFO method, inventory sold is assumed to be of the inventory first purchased.

		Purchases			Cost of goods sold			Inventory balance
Date	Event	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost
Mar.1	Opening balance							500	4	2,000
Mar.7	Purchase	2,000	5	10,000				500	4	2,000
								2,000	5	10,000
Mar.12	Sale				500	4	2,000
					1,800	5	9,000	200	5	1,000
Mar.17	Purchase	1,800	6	10,800				200	5	1,000
								1,800	6	10,800
Mar.27	Sale				200	5	1,000
					1,700	6	10,200	100	6	600
		Balances			4,200		22,200	100		600

In the above table, after each purchase or sale closing inventory balances are shown with respective purchase prices. finally in balances 100 units of inventory is left with a dollar value of 600 from the last purchase on Mar.17

The amount of cost of goods sold for 4,200 units sold is 22,200

Each sale is bifurcated to show the lots from which units are sold. Suppose on Mar.12 sale of 2300 units 500 are selected from opening balance and the rest 1800 from the lot purchased on Mar. 7 this is because FIFO uses inventory first purchased.

2

LIFO method

under LIFO method, to arrive at cost of goods sold units sold is first matched to the latest lot of inventory purchased.

Below table shows the effect of each purchase or sale of cost of goods sold and ending inventory balances.

		Purchases			Cost of goods sold			Inventory balance
Date	Event	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost
Mar.1	Opening balance							500	4	2,000
Mar.7	Purchase	2,000	5	10,000				500	4	2,000
								2,000	5	10,000
Mar.12	Sale				2,000	5	10,000
					300	4	1,200	200	4	800
Mar.17	Purchase	1,800	6	10,800				200	4	800
								1,800	6	10,800
Mar.27	Sale				1,800	6	10,800
					100	4	400	100	4	400
		Balances			4,200		22,400	100		400

Note:

When a sale is made, units are first selected from latest purchase first then the next latest purchase available. for example on mar.12 sale of 2300 units first 2,000 units are selected from Mar.7 purchase lot then the remaining 300 from the opening balance lot.

Cost of goods sold arrived is 22,400 and the ending inventory value is 400

3

Average cost method:

It is also called moving average, as an average inventory cost is arrived after each purchase and the last such rate is used for arriving at the value of cost of goods sold for each sale.

the flow is as below:

		Purchases			Cost of goods sold				Inventory balance
Date	Event	Quantity	Unit cost	Total cost	Quantity	Unit cost	Total cost		Quantity	Unit cost	Total cost
Mar.1	Opening balance								500	4	2,000
Mar.7	Purchase	2,000	5	10,000					500	4	2,000
									2,000	5	10,000
								Total balance	2,500	4.80	12,000
Mar.12	Sale				2,300	4.80	11,040		200	4.80	960
Mar.17	Purchase	1,800	6	10,800					200	4.80	960
									1,800	6	10,800
								Total balance	2,000	5.88	11,760
Mar.27	Sale				1,900	5.88	11,172		100	5.88	588
		Balances			4,200		22,212		100		588

Cost of goods sold is 22,212 and ending inventory balance is 588

Note:

On each purchase respectively on Mar.7 and Mar.17 a new average cost is calculated which is nothing but total value of inventory on that date / total units of inventory.

when a sale made respective average rate is used to arrive at cost of goods sold.

A new average is calculated only on purchase not required on sale.

Average unit cost on Mar. 7 = 12000/2500 = 4.80

Average unit cost on Mar. 17 = 11760/2000 = 5.88