FIFO, LIFO and average cost method in periodic inventory system. Angelo Plc uses a periodic inventory...
FIFO, LIFO and average cost method in periodic inventory system.
Angelo Plc uses a periodic inventory system. The beginning balance of inventory and purchases made by the company during the month of July, 2016 are given below:
July 1: Beginning inventory, 500 units @ $20 per unit.
July 18: Inventory purchased, 800 units @ $24 per unit.
July 25: Inventory purchased, 700 units @ $26 per unit.
The company sold 1,400 units during the month of July. Required: Compute inventory on July 31, 2016 and cost of goods sold for the month of July using following inventory costing methods:
a. LIFO
b. FIFO
c. Average cost
Homework Answers
A. LIFO Method.
Under this method, it assumes that last purchased items are one those sold out first. So while assigning cost to ending inventory, the units purchased first is applied.
Total units available for sale = beginning inventory + all purchases.
Total units available for sale = 500 + 800 + 700
Total units available for sale = 2,000 units.
Number of units sold = 1,400 units.
Ending inventory = 600 units.
So under LIFO, the 1,400 units consists of first 700 units from last purchase, and balance 700 units from July 18 purchase. So ending inventory consists of 500 units from beginning inventory and balance 100 units from July 18 purchase.
Cost of goods sold = (700 units x 26) + ( 700 units x 24)
Cost of goods sold = $ 35,000.
Ending inventory = (500 units x 20) + ( 100 units x 24)
Ending inventory = $ 12,400.
B. FIFO Method.
Under this method, it assumes that first purchased or available units are sold out first. So 1,400 units sold consists of 500 units from beginning first, 800 units from July 18 purchase and 100 units from July 25 purchase. So ending inventory of 600 units consists of units left from July 25 purchases.
Cost of goods sold =(500 units x 20) + ( 800 units x 24) + ( 100 units x 26)
Cost of goods sold = $ 31,800.
Ending inventory = 600 units x 26
Ending inventory = $ 15,600.
C. Average Method.
Under this method, average cost per unit is multiplies by number of units sold to get cost of goods sold and multiplied with ending units to get ending inventory value. Average cost per unit is computed by dividing cost of goods available for sale by total number of units available for sale.
Cost of goods available for sale = ( 500 units x 20) + ( 800 units x 24) + ( 700 units x 26)
Cost of goods available for sale = $ 47,400.
Total units available for sale = 2,000 units.
Average cost per unit = 47,400/2,000
Average cost per unit = $ 23.70 per unit.
Cost of goods sold = 1,400 units x 23.70
Cost of goods sold = $ 33,180.
Ending inventory = 600 units x 23.70
Ending inventory = $ 14,220.
SUMMARY:
A. LIFO Method.
Cost of goods sold = $ 35,000
Ending inventory = $ 12,400
B. FIFO Method.
Cost of goods sold = $ 31,800
Ending inventory = $ 15,600
C. Average Method.
Cost of goods sold = $ 33,180
Ending inventory = $ 14,220
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