Question

method would it choose? P6-29A Accounting for inventory using the perpetual inventory system- FIFO, LIFO, and weighted average, and comparing FIFO, LIFO, and weighted average Steel Mill began August with 50 units of iron inventory that cost $35 each. During August, the company completed the following inventory transactions: 5. Units Unit Cost Unit Sales Price $85 45 Aug. 3 8 Sale Purchase 90 $54 21 Sale 88 30 Purchase 15 58 Requirements 1. Prepare a perpetual inventory record for the merchandise inventory using the FIFO inventory costing method. 2. Prepare a perpetual inventory record for the merchandise inventory using the LIFO inventory costing method.

Answer 1

Answer 1)

Perpetual Inventory Record using FIFO inventory costing method

Date	Purchases			Cost of Goods Sold			Inventory Balance
	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount
Aug'1							50	$ 35	$ 1,750
Aug'3				45	$ 35	$ 1,575	5	$ 35	$ 175
Aug'8	90	$ 54	$ 4,860				5	$ 35	$ 175
							90	$54	$ 4,860
Aug'21				5	$ 35	$ 175	10	$ 54	$ 540
				80	$ 54	$ 4,320
Aug'30	15	$ 58	$ 870				10	$ 54	$ 540
							15	$ 58	$ 870
Total	105		$ 5,730	130		$ 6,070	25		$ 1,410

Answer 2)

Perpetual Inventory Record using LIFO inventory costing method

Date	Purchases			Cost of Goods Sold			Inventory Balance
	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount
Aug'1							50	$ 35	$ 1,750
Aug'3				45	$ 35	$ 1,575	5	$ 35	$ 175
Aug'8	90	$ 54	$ 4,860				5	$ 35	$ 175
							90	$ 54	$ 4,860
Aug'21				85	$ 54	$ 4,590	5	$ 35	$ 175
							5	$ 54	$ 270
Aug'30	15	$ 58	$ 870				5	$ 35	$ 175
							5	$ 54	$ 270
							15	$ 58	$ 870
Total	105		$ 5,730	130		$ 6,165	25		$ 1,315

Answer 3)

Perpetual Inventory Record using Weighted Average inventory costing method

Date	Purchases			Cost of Goods Sold			Inventory Balance
	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount	Units	Cost per Unit	Amount
Aug'1							50	$ 35	$ 1,750
Aug'3				45	$ 35	$ 1,575	5	$ 35	$ 175
Aug'8	90	$ 54	$ 4,860				5	$ 35	$ 175
							90	$ 54	$ 4,860
							95	$ 53	$ 5,035
Aug'21				85	$ 53	$ 4,505	10	$ 53	$ 530
Aug'30	15	$ 58	$ 8,70				10	$ 53	$ 530
							15	$ 58	$ 870
							25	$ 56	$ 1,400
Total	105		$ 5,730	130		$ 6,080	25		$ 1,400

Note: The field highlighted in green colour in the above table are used to calculate the weighted average cost. For instance weighted average cost of 95 units of inventory as on Aug’8 is $ 53 per unit. Similarly, weighted average cost of 25 units on Aug’30 is $ 56 per unit.

Answer 4)

From the perusal of above tables (in Answer 1, 2, and 3), it can be concluded that the cost of goods sold under the three methods are:

FIFO Method: $ 6,070.

LIFO Method: $ 6,165

Weighted Average cost method: $ 6,080.

Answer 5)

Calculation of Gross Profit under FIFO, LIFO and Weighted Average cost method

Particulars	FIFO	LIFO	Weighted Average Method
Sales	$ 11,305	$ 11,305	$ 11,305
Less: Cost of Goods Sold	$ 6,070	$ 6,165	$ 6,080
Gross Profit	$ 5,235	$ 5,140	$ 5,225

The gross profit under FIFO method is $ 5,235, under LIFO method is $ 5,140 and weighted average cost method is $ 5,225.

Working note:

Calculation of total sales:

Date	Units	Selling Price per unit	Amount
Aug'3	45	$ 85	$ 3,825
Aug'21	85	$ 88	$ 7,480
Total	130		$ 11,305

Answer 6)

Decision: From the perusal of table in Answer 5, it is evident that if the business wanted to maximise gross profit, FIFO method should be selected. It is because under inflationary conditions (i.e. where prices are rising on each subsequent purchases), cost of goods sold is minimum under FIFO method as the units bought first at cheaper rates are first sold.