Question

The following information relates to Hogs Back Falls Ltd.’s inventory transactions during the month of February.

				Units		Cost/Unit		Amount
Feb. 1		Beginning inventory		7,500		$23.00		$172,500
10		Sale		6,500
14		Purchase		4,000		$24.00		$96,000
18		Purchase		500		$28.00		$14,000
25		Sale		4,300
26		Purchase		4,200		$33.00		$138,600
28		Sale		3,200

All of the units sold were priced at $92.00 per unit.

Hogs Back Falls Ltd. uses the perpetual inventory system. Calculate Hogs Back’s cost of goods sold, gross margin, and ending inventory for the month of February using FIFO.

Cost of Goods Sold		$
Gross Margin		$
Ending Inventory		$

Hogs Back Falls Ltd. uses the perpetual inventory system. Calculate Hogs Back’s cost of goods sold, gross margin, and ending inventory for the month of February using weighted-average. (Round calculations for cost per unit to 2 decimal places, e.g. 10.52 and final answers to 0 decimal places, e.g. 61,052.)  

Cost of Goods Sold		$
Gross Margin		$
Ending Inventory		$

Which of the cost formulas would produce the higher gross margin?

The                                                                       FIFOweighted average method results in the higher gross margin.

Answer 1

Perpetual system and FIFO method :
Date	Purchase			Sales (at cost)			Balance
	Units	Unit cost	Total cost	Units	Unit cost	Total cost	Units	Unit cost	Total cost
Feb. 1							7500	23	172500
Feb. 10				6500	23	149500	1000	23	23000
Feb. 14	4000	24	96000				1000	23	23000
							4000	24	96000
Feb. 18	500	28	14000				1000	23	23000
							4000	24	96000
							500	28	14000
Feb. 25				1000	23	23000	700	24	16800
				3300	24	79200	500	28	14000
Feb. 26	4200	33	138600				700	24	16800
							500	28	14000
							4200	33	138600
Feb. 28				700	24	16800	2200	33	72600
				500	28	14000
				2000	33	66000

Total units sold = 6500 + 4300 + 3200	14000
Sales = ( Total units sold * Selling price ) = ( 14000 * 92.00 )	1288000

Cost of goods sold = 149500 + 23000 + 79200 + 16800 + 14000	282500
Gross margin = Sales - Cost of goods sold = 1288000 - 282500	1005500
Ending inventory	72600

Perpetual system and weighted average method :
Date	Purchase			Sales (at cost)			Balance
	Units	Unit cost	Total cost	Units	Unit cost	Total cost	Units	Unit cost	Total cost
Feb. 1							7500	23	172500
Feb. 10				6500	23	149500	1000	23	23000
Feb. 14	4000	24	96000				5000	23.8	119000
Feb. 18	500	28	14000				5500	24.18	133000
Feb. 25				4300	24.18	103974	1200	24.19	29026
Feb. 26	4200	33	138600				5400	31.04	167626
Feb. 28				3200	31.04	99328	2200	31.04	68298

Cost of goods sold = 149500 + 103974 + 99328	352802
Gross margin = Sales - Cost of goods sold = 1288000 - 352802	935198
Ending inventory	68298

The

FIFO

method results in the higher gross margin