Question

FIFO, LIFO, and WEIGHTED AVERAGE METHOD:

Hurst Company's beginning inventory and purchases during the fiscal year ended December 31, 20X2 were as follows Date Event Units Unit Price Total Cost January 1,20X2 January 12 February 28 June 29 August 31 October 29 November 30 December 21 g. Invento 1st purchase 2nd purchase 3rd purchase 4th purhcase 5th purchase 6th purchase 7th purchase 1,500 10.00$ 15,000.00 500 11.50$ 5,750.00 600 S14.50$ 8,700.00 1,200 15.00 18,000.00 800 $ 16.50$ 13,200.00 300 $ 18.00$ 5,400.00 700 S 18.50 12,950.00 400 S 20.00$ 8,000.00 $87,000.00 be 6,000 There are 1,200 units of inventory on hand at December 31,20X2 Required: 2a) Compute the Gross Margin for each of the methods assuming that the Unit sales price was $20.00 for each unit sold 2b) Answer the question "Which method resulted in the highest gross margin?" FIFO method LIFO Method Weighted Average Sales units x Selling Price Less: Cost of Goods Sold Gross Margin 2b) Which method resulted in the highest gross margin?

Answer 1

Number of units available for sale = 6,000
Number of units in ending inventory = 1,200

Number of units sold = Number of units available for sale - Number of units in ending inventory
Number of units sold = 6,000 - 1,200
Number of units sold = 4,800

Sales = Number of units sold * Selling Price
Sales = 4,800 * $20.00
Sales = $96,000

FIFO:

Cost of goods sold = 1,500 * $10.00 + 500 * $11.50 + 600 * $14.50 + 1,200 * $15.00 + 800 * $16.50 + 200 * $18.00
Cost of goods sold = $64,250

Gross profit = Sales - Cost of goods sold
Gross profit = $96,000 - $64,250
Gross profit = $31,750

LIFO:

Cost of goods sold = 400 * $20.00 + 700 * $18.50 + 300 * $18.00 + 800 * $16.50 + 1,200 * $15.00 + 600 * $14.50 + 500 * $11.50 + 300 * $10.00
Cost of goods sold = $75,000

Gross profit = Sales - Cost of goods sold
Gross profit = $96,000 - $75,000
Gross profit = $21,000

Weighted Average:

Cost per unit = Cost of goods available for sale / Number of units available for sale
Cost per unit = $87,000 / 6,000
Cost per unit = $14.50

Cost of goods sold = 4,800 * $14.50
Cost of goods sold = $69,600

Gross profit = Sales - Cost of goods sold
Gross profit = $96,000 - $69,600
Gross profit = $26,400

FIFO results in highest gross margin.