Question

Exercise 5-20 Effect of inventory cost flow on ending inventory balance and gross margin Dugan Sales had the following transactions for jackets in 2014, its first year of operations: Jan. 20 Apr. 21 July 25 Sept. 19 Purchased 80 units @ $15 Purchased 420 units @ $16 Purchased 250 units @ $20 Purchased 150 units @ $22 $1,200 6,720 5,000 3,300 During the year, Dugan Sales sold 830 jackets for S40 each. Required a. Compute the amount of ending inventory Dugan would report on the balance sheet, assum- ing the following cost flow assumptions: (1) FIFO, (2) LIFO, and (3) weighted average. b. Compute the difference in gross margin between the FIFO and LIFO cost flow assumptions.

Answer 1

a) The ending inventory under the (1) FIFO (2) LIFO (3) weighted Average is as follows:

(1) FIFO Method:

Ending inventory = 80 Units + 420 units + 250 units + 150 units - 830 units

                        = 70 units

Ending inventory cost = 70 units * $22

                                = $1,540

(2) LIFO Method:

Ending inventory = 80 Units + 420 units + 250 units + 150 units - 830 units

                        = 70 units

Ending inventory cost = 70 units * $15

                                = $1,050

(3) Weighted Average Method:

Ending inventory = 80 Units + 420 units + 250 units + 150 units - 830 units

                        = 70 units

Cost per unit = $1,200 + $6,720 + $5,000 + $3,300 / 80 Units + 420 units + 250 units + 150 units

                   = $16,220 / 900 Units

                    = $18.02

Ending inventory cost = 70 units * $18.02

                                = $1,262

b) The difference in gross margin between FIFO and LIFO is calculated as follows:

1)Cost of goods under the FIFO method = Begining inventory + Purchases - Ending inventory

                                                       = ($1,200 + $6,720 + $5,000 + $3,300) - $1,540

                                                         = $16,220 - $1,540

                                                           = $14,680

Gross Profit = Sale - Cost of goods

                  = (830 * $40) - $14,680

                  = $33,200 - $14,680

                  = $18,520

Gross Profit under the FIFO method = $18,520

2) Cost of goods under the LIFO method = Begining inventory + Purchases - Ending inventory

                                                          = ($1,200 + $6,720 + $5,000 + $3,300) - $1,050

                                                          = $16,220 - $1,050

                                                          = $15,170

Gross Profit = Sale - Cost of goods

                  = (830 * $40) - $15,170

                  = $33,200 - $15,170

                  = $18,030

Gross Profit under the LIFO method = $18,030

The difference in gross margin between FIFO and LIFO = Gross Profit under the FIFO method - Gross Profit under the LIFO method.

The difference in gross margin between FIFO and LIFO = $18,520 - $18,030

                                                                                = $490

The difference in gross margin between FIFO and LIFO = $490