Question

Save-Mart Center Inc. began operations on May 1 and uses a perpetual inventory system. During May, the company had the following purchases and sales for one of its products:

	Purchases		Sales
Date	Units	Unit Cost	Units	Unit Price
May  1	120	$100
3			80	$250
8	100	110
13			80	275
15	60	115
20			60	300
27			40	325

Instructions

(a)  

Determine the cost of goods sold and cost of ending inventory using (1) FIFO and (2) average cost. Ignore the effect of income tax. (For average cost, use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(b)  

What guidelines should Save-Mart consider in choosing between the FIFO and average cost formulas?

(c)  

Which cost formula produces the higher gross profit and net income?

(d)  

Which cost formula produces the higher ending inventory valuation?

(e)  

Which cost formula produces the higher cash flow?

Answer 1

	CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER FIFO METHOD
			PURHASES			COST OF GOODS SOLD			CLOSING BALANCE
	Date	Particulars	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost	Units (A)	Rate Per unit	Total Cost
	May, 01	Purchase	120	$                         100	$                        12,000				120	$            100	$      12,000
	May , 03	Sales				80	$                100	$           8,000	40	$            100	$         4,000
	May , 08	Purchase	100	$                         110	$                        11,000				40	$            100	$         4,000
									100	$            110	$      11,000
	May, 13	Sales				40	$                100	$           4,000
						40	$                110	$           4,400	60	$            110	$         6,600
	May , 15	Purchase	60	$                         115	$                          6,900				60	$            110	$         6,600
									60	$            115	$         6,900
	May , 20	Sales				60	$                110	$           6,600	60	$            115	$         6,900
	May , 20	Sales				40	$                115	$           4,600	20	$            115	$         2,300
					Total	260		$         27,600	20		$         2,300
			Unit	Amount
		COGS as per FIFO Method	260.00	$27,600.00
	CALCULATION OF COST OF ENDING INVENTORY AND COST OF GOODS SOLD UNDER Weighted Average Method
			Units	Rate	Amount
		May ,01 Purchase	120	$100	$12,000
		May ,08 Purchase	100	$110	$11,000
		May ,15 Purchase	60	$115	$6,900
		Total	280		$29,900
		Sales = 80+80+60+40 =	260
		Closing Stock	20
		Cost per unit = $ 29,900 / 280 Units =	106.79	Per Units
		Closing inventory = $ 106.79 X 20 Units =	$2,135.71
		COST of Goods Sold = 260 untis X 106.79 =	$27,764
		Answer =A)	FIFO	Average Cost Method
		COGS	$27,600	$27,764
		Closing inventory	$2,300	$2,136
		Answer =B)
		In FIFO method we can take the cost on the basis of first in first out and in average costing we have to take
		the average of the all purchases made
		Answer = C)
		FIFO method will produce heigher Gross profit and net income because it have low COGS
		Answer = D)
		FIFO methof have the heigher ending inventory balance
		Answer = E)
		Average cost method will produce heigher cash flow because it have low inventory balance at the end