Question

Inventory Costing Methods—Periodic System

The following information is available concerning the inventory of Carter Inc.:

	Units	Unit Cost
Beginning inventory	202	$9
Purchases:
March 5	297	10
June 12	401	11
August 23	254	12
October 2	153	14

During the year, Carter sold 1,015 units. It uses a periodic inventory system.

Required:

1. Calculate ending inventory and cost of goods sold for each of the following three methods:

In your calculations round average unit cost to the nearest cent, and round all other calculations and your final answers to the nearest dollar.

Cost Flow Assumption	Ending Inventory	Cost of Goods Sold
a. Weighted average	$	$
b. FIFO	$	$
c. LIFO	$	$

2. Assume an estimated tax rate of 30%. How much more or less (indicate which) will Carter pay in taxes by using FIFO instead of LIFO?

Difference in taxes under FIFO vs. LIFO	$
Does this amount represent more or less taxes paid using FIFO?

3. Assume that Carter prepares its financial statements in accordance with IFRS. Which costing method should it use to pay the least amount of taxes?

Answer 1

Solution 1:

Computation of COGS and ending inventory - Periodic Weighted Average cost method
Particulars	Cost of goods available for sale			Cost of goods sold - Average cost			Ending Inventory - Average cost
	Nos of units	Unit Cost	Cost of goods available for sale	Nos of units sold	Unit Cost	Cost of goods sold	Nos of units in ending inventory	Unit Cost	Ending inventory
Beginning inventory	202	$9.00	$1,818
Purchases:
5-Mar	297	$10.00	$2,970
12-Jun	401	$11.00	$4,411
23-Aug	254	$12.00	$3,048
2-Oct	153	$14.00	$2,142
Total	1307	$11.01	$14,389	1015	$11.01	$11,174	292	$11.01	$3,215

Computation of COGS and ending inventory - Periodic FIFO
Particulars	Cost of goods available for sale			Cost of goods sold			Ending Inventory
	Nos of units	Unit Cost	Cost of goods available for sale	Nos of units sold	Unit Cost	Cost of goods sold	Nos of units in ending inventory	Unit Cost	Ending inventory
Beginning inventory	202	$9.00	$1,818	202	$9.00	$1,818.00	0	$9.00	$0.00
Purchases:
5-Mar	297	$10.00	$2,970	297	$10.00	$2,970.00	0	$10.00	$0.00
12-Jun	401	$11.00	$4,411	401	$11.00	$4,411.00	0	$11.00	$0.00
23-Aug	254	$12.00	$3,048	115	$12.00	$1,380.00	139	$12.00	$1,668.00
2-Oct	153	$14.00	$2,142	0	$14.00	$0.00	153	$14.00	$2,142.00
Total	1307		$14,389	1015		$10,579.00	292		$3,810.00

Computation of COGS and ending inventory - Periodic LIFO
Particulars	Cost of goods available for sale			Cost of goods sold			Ending Inventory
	Nos of units	Unit Cost	Cost of goods available for sale	Nos of units sold	Unit Cost	Cost of goods sold	Nos of units in ending inventory	Unit Cost	Ending inventory
Beginning inventory	202	$9.00	$1,818	0	$9.00	$0.00	202	$9.00	$1,818.00
Purchases:
5-Mar	297	$10.00	$2,970	207	$10.00	$2,070.00	90	$10.00	$900.00
12-Jun	401	$11.00	$4,411	401	$11.00	$4,411.00	0	$11.00	$0.00
23-Aug	254	$12.00	$3,048	254	$12.00	$3,048.00	0	$12.00	$0.00
2-Oct	153	$14.00	$2,142	153	$14.00	$2,142.00	0	$14.00	$0.00
Total	1307		$14,389	1015		$11,671.00	292		$2,718.00

Solution 2:

Difference in taxes under FIFO vs. LIFO = Difference in COGS * 30% = ($11,671 - $10,579)*30% = $327.60

This amount represents more taxes paid using FIFO.

Solution 3:

Carter should use LIFO method to pay least amount of taxes as under this method cost of goods sold is highest.