Question

Topanga Group began operations early in 2021. Inventory purchase information for the quarter ended March 31, 2021, for Topanga's only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system to report inventory and cost of goods sold Date of Purchase Jan. 7 Feb. 16 March 22 Totals Units 7,000 28,000 32,000 67,000 Unit Cost $6.00 7.00 8.00 Total Cost $ 42,000 196, eee 256, eee $494,000 Sales for the quarter, all at $10 per unit, totaled 39,000 units leaving 28,000 units on hand at the end of the quarter

Answer 1

REQ 1A
Cost of goods sold using FIFO
FIFO	Cost of Goods available for sale			Cost of Goods sold-Periodic FIFO			Ending Inventory -Periodic FIFO
	units	Cost per unit($)	Cost of goods available for sale	units	Cost per unit	Cost of Goods sold	of units in ending inventory	Cost per unit($)	Ending Inventory
Beginning Inventory
Purchases:
Jan-07	7000	6	42000	7000	6	42000	0	6	0
Feb-16	28000	7	196000	28000	7	196000	0	7	0
Mar-22	32000	8	256000	4000	8	32000	28000	8	224000
	67000		494000	39000		270000	28000		224000

*In FIFO method goods which come first are sold first

REQ 1B
Cost of goods sold using LIFO
LIFO	Cost of Goods available for sale			Cost of Goods sold-Periodic LIFO			Ending Inventory -Periodic LIFO
	units	Cost per unit($)	Cost of goods available for sale	units	Cost per unit	Cost of Goods sold	of units in ending inventory	Cost per unit($)	Ending Inventory
Beginning Inventory
Purchases:
Jan-07	7000	6	42000	0	6	0	7000	6	42000
Feb-16	28000	7	196000	7000	7	49000	21000	7	147000
Mar-22	32000	8	256000	32000	8	256000	0	8	0
	67000		494000	39000		305000	28000		189000

*In LIFO method goods which come last are sold first

REQ 1C

Cost of goods sold using Average Cost
Average Cost	Cost of Goods available for sale			Cost of Goods sold-Average Cost			Ending Inventory -Average Cost
	units	Cost per unit($)	Cost of goods available for sale	units	Cost per unit	Cost of Goods sold	of units in ending inventory	Cost per unit($)	Ending Inventory
Beginning Inventory
Purchases:
Jan-07	7000	6	42000				7000	6	42000
Feb-16	28000	7	196000				35000	6.8	238000
Mar-22	32000	8	256000				67000	7.4	495800
Mar-31				39000	7.4	288600	28000	7.4	207200
						288600
Working Notes
Calculation of Average Cost at the end of the quarter
Weighted Average Cost per unit				Units	Unit Cost	Purchase Price($)
Purchases:
Jan-07				7000	6	42000
Feb-16				28000	7	196000
Mar-22				32000	8	256000
			Total	67000		494000
			Average Cost p.unit		494000/67000
					*$7.373
Weighted Average Cost per unit on Feb-16			=	(196000+42000)/7000+28000
			=	$6.8

REQ 2
Calculation of Gross Profit
		Choose Numerator	Divided By	Choose Denominator	=	Gross Profit ratio(in%)
FIFO		120000		390000	=	30.76923
LIFO		85000		390000	=	21.79487
AVERAGE COST		101400		390000	=	26

Working Note
Gross Profit Ratio=(Gross Profit/Sales)100%
and Gross Profit=Sales-Cost of Goods Sold
Sales =39000*10 = $390000
Hence,	Gross Profit
FIFO           =390000-270000 = 120000
LIFO           =390000-305000 = 85000
Average Cost=390000-288600=101400

REQ 3

It is seen that the cost per unit is showing an increasing trend so if FIFO method is followed it would cause a higher closing inventory and lower cost of goods sold which means profitability ratio will be higher.

Therefore if LIFO method is followed it would cause a lower closing inventory and higher cost of goods sold which means profitability ratio will be lower.

In weighted average cost method cost of goods sold is higher than FIFO but lower than LIFO so the gross profit is lower than FIFO and higher than LIFO.