Question

Required information

Exercise 5-19 Effect of inventory cost flow (FIFO, LIFO, and weighted average) on gross margin LO 5-6

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The following information pertains to Mason Company for 2018:

Beginning inventory	90	units	@	$	20
Units purchased	280	units	@	$	25

Ending inventory consisted of 40 units. Mason sold 330 units at $50 each. All purchases and sales were made with cash. Operating expenses amounted to $4100.

rev: 09_05_2017_QC_CS-97527

Exercise 5-19 Part a

Required

1. Compute the gross margin for Mason Company using the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average.

Answer 1

Answer

Gross margin:

FIFO = $8,700

LIFO = $8,500

Weighted average = $8,651.35

Explanation

Net sales = 330 × $50 = $16,500

FIFO:

COGS is computed using the equation given below:

COGS = {90 units of beginning inventory * price} + {240 units of Purchased units * price}

            = {90 * $20} + {240 * $25}

           = $1,800 + $6,000

          = $7,800

Gross margin = Net sales – COGS

                       = $16,500 – $7,800

                       = $8,700.

LIFO:

COGS is computed using the equation given below:

COGS = {50 units of beginning inventory * price} + {280 units of Purchased units * price}

            = {50 * $20} + {280 * $25}

           = $1,000 + $7,000

          = $8,000

Gross margin = Net sales – COGS

                       = $16,500 – $8,000

                       = $8,500.

Weighted average:

Average cost = {(50 units of beginning inventory * price) + (280 units of Purchased units * price)} ÷ Total inventory

                     = {(90 * $20) + (280 * $25)} ÷ (90 + 280)

                     = {$1,800 + $7,000} ÷ 370

                    = $23.7838

COGS = 330 * $23.7838

            = $7,848.65

Gross margin = $16,500 – $7,848.65

                       = $8,651.35