Question

1. Assume your organization has the following inventory changes during the year:
            Beginning Inventory               20 units valued at $7,500 each
            January purchases                   10 units at $8,500 each
            April purchases                       15 units at $8,750 each
   
            Total Units Used                     30
   
   Calculate the value of the ending inventory and the value of the inventory used (the inventory expense) for the year using both the FIFO and the LIFO method of cost-flow.

Answer 1

Solution:

As per the information given in the question we have

Beginning Inventory units = 20 units at $ 7,500 each

January Purchases = 10 units at $ 8,500 each

April Purchases = 15 units at $ 8,750 each

Total units used = 30 units

a. As per FIFO method:

If the firm sold 30 units, as per FIFO :

As per the First In First Out (FIFO) Method of Inventory Accounting, the units produced earliest are assumed to be sold first.

Thus the production units that are Purchased at the earliest date i.e., 20 units from beginning Inventory and 10 units from the January purchases shall be included in the Inventory Expense first.

Thus Inventory Expense, assuming FIFO Inventory = ( 20 * $ 7,500 ) + ( 10 * $ 8,500 )

= $ 150,000 + $ 85,000 = $ 235,000

Thus the Inventory Expense, as per FIFO method = $ 235,000

The balance number of units ( 20 + 10 + 15 – 30 ) = 15 units from the April purchases shall form a part of the ending Inventory.

Thus the ending Inventory = 15 * $ 8,750 = $ 131,250

Thus the ending Inventory as per FIFO Method = $ 131,250

b. As per LIFO method:

If the firm sold 30 units, as per LIFO :

As per the Last In First Out (LIFO) Method of Inventory Accounting, the latest units purchased are assumed to be sold first.

Thus the production units that are purchased most recently, i.e., 15 units from the month of April, 10 units from the month of January and 5 units from the Beginning Inventory Units shall be included in the Inventory Expense first.

Thus Inventory Expense, assuming LIFO Inventory = ( 15 * $ 8,750 ) + ( 10 * $ 8500 ) + ( 5 * $ 7,500 )

= $ 131,250 + $ 85,000 + $ 37,500 = $ 253,750

Thus the Inventory Expense, as per LIFO method = $ 253,750

The balance number of units ( 20 + 10 + 15 – 30 ) = 15 units from the beginning Inventory shall form a part of the ending Inventory.

Thus the ending Inventory = 15 * $ 7,500 = $ 112,500

Thus the ending Inventory as per LIFO Method = $ 112,500