Question

Berry Corporation had 50,000 units in beginning inventory at a total cost of $150,000. The company purchased 15,000 units for a total cost of $37,500. At the end of the month, the company had 17,000 units left in ending inventory. Instructions: a) Compute the cost of the ending inventory and the cost of goods old under 1) FIFO, 2) LIFO and 3) Average Cost. b) Which cost flow method would result in the highest net income? c) Which cost flow method would result in inventories approximating current cot in the balance sheet? d) Which cost flow method would result in Berry paying the least taxes in the first year?

Answer 1

FIFO: Under the FIFO method, it is assumed that the goods purchased first are the goods sold first. So the ending inventory would represent the goods purchased later in point of time.
LIFO: Under the LIFO method, it is assumed that the goods purchased last are the goods sold first. So the ending inventory would represent the goods which are purchased first in point of time.
Average cost: Under the average cost method, average cost per unit is found for units available for sale and the average cost arrived is used to calculate ending inventory and cost of goods sold.

(a) Cost of goods available for sale Beginning inventory Purchases Cost of goods available for sale Units 50,000 15,000 65,000 Cost per unit $ 3.00 $ $ 2.50$ $ Cost 150,000 37,500 187,500 Units sold 48,000 (65,000 units - 17,000) 1) FIFO - Ending inventory Date Beginning inventory Purchases Ending inventory Units Cost per unit 2,000 $ 3.00 15,000 $ 2.50 17,000 $ $ $ Cost 6,000 37,500 43,500 FIFO Cost of goods sold = Cost of goods Javailable for sale - Ending inventory $ 144,000 ($ 187,500 - $ 43,500) 2) LIFO - Ending inventory Date Beginning inventory Ending inventory Units 17,000 17,000 Cost per unit $ 3.00 $ $ Cost 51,000 51,000 LIFO Cost of goods sold = Cost of goods available for sale - Ending inventory $ 136,500 ($ 187,500 - $ 51,000)

3) Average Cost Average cost per unit = Cost of goods available for sale/Total units available for sale $ 2.88 Cost of goods sold Ending inventory $ $ 138,462 49,038 b) Highest net income would result in LIFO method as it has lowest cost of goods sold of $ 136,500. c) FIFO method would result in inventories approximating current costs in the balance sheet as inventories purchased later in point of time represents ending inventory. d) FIFO method would result in Berry paing least taxes as it has highest cost of goods sold of $144,000.