Question

Problem 4. McLean Company Inc. had a beginning inventory of 300 units of Product MLN at a cost of $8 per unit. During the year, purchases were: Feb. 20 700 units at $ 9 Aug. 12 600 units at $11 May 5 500 units at $10 Dec. 8 100 units at $12 McLean Company uses a periodic inventory system. Sales totaled 1,800 units. Instructions (a) Determine the cost of goods available for sale. (b) Determine the ending inventory and the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average cost). Prove the accuracy of the cost goods sold under the FIFO and LIFO methods (c) Which cost flow method results in the lowest inventory amount for the balance sheet? The lowest cost of goods sold for the income statement?

Answer 1

(a)

Units Cost per unit Total cost $8 Beginning inventory Feb. 20 purchase May 5 purchase August 12 purchase December 8 purchase Total cost of goods available for sale 300 700 500 600 100 2,200 $ 9 $ 10 $ 11 $ 12 $ 2,400 $ 6,300 $5,000 $6,600 $ 1,200 $ 21,500

(b)

Ending inventory Cost of goods sold FIFO 4,500 17,000 LIFO Average cost $3,300 $3,909.09 $18,200 $ 17,590.91

Working notes:

FIFO: Ending inventory Units Cost per Ending Beginning inventory Feb. 20 purchase May 5 purchase August 12 purchase December 8 purchase 700 Purchases Units Cost per unit 300 $ 8 $9 500 S 10 600 $ 11 100 $ 12 2,200 Cost of goods sold Units Cost per Cost of 300 $8 I $2,400 700 $9 $ 6,3001 500 $ 10 $5,000 300 $ 11 $3,300 Total cost $2,400 $6,300 $5,000 $6,600 $ 1,200 $ 21,500 300 100 400 $ 11 $ 12 $3,300 $ 1,200 $4,500 1,800 $ 17,000 LIFO: Cost of goods sold Units Cost per Cost of Ending inventory Units Cost per Ending 300 $8 $2,400 100 $9 $ 900 300 $9 Beginning inventory Feb. 20 purchase May 5 purchase August 12 purchase December 8 purchase Purchases Units Cost per unit Total cost $8 $ 2,400 700 $9 $ 6,300 500 S 10 $5,000 $6,600 100 $ 12 $ 1,200 2,200 $ 21,500 600 11 600 500 600 100 1,800 $5,400 $5,000 $6,600 $ 1,200 $ 18,200 $ 12 400 $3,300 Average cost method: Ending invenoty = 400 units x ($21,500 / 2,200 units) = 3,909.09 Cost of goods sold = 1,800 units x ($21,500 / 2,200 units) = 17,590.91

(c)

LIFO results in lowest inventory amount for balance sheet.

FIFO results in lowest cost of goods sold amount for income statement.