Question

Inventory Costing Methods On June 1, Welding Products Company had a beginning inventory of 210 cases of welding rods that had been purchased for $88 per case. Welding Products purchased 1,150 cases at a cost of $95 per case on June 3. On June 19, the company purchased another 950 cases at a cost of $112 per case. Sales data for the welding rods are as follows: Date Cases Sold June 9 990 June 29 975 Welding Products uses a perpetual inventory system, and the sales price of the welding rods was $130 per case. 1. Compute the cost of ending inventory and cost of goods sold using the FIFO method. Cost of ending inventory Cost of goods sold 2. Compute the cost of ending inventory and cost of goods sold using the LIFO method, Cost of ending inventory Cost of goods sold

Answer 1

Ans1: Perpetual Inventory System: In this system, the cost of sales and inventories are updated on every sales and purchase transactions. First in, first out method (FIFO): In this method it is assumed that Inventory which is purchased first will be sold first and the inventory will consist of recent purchases. Purchase Cost of Good Sold Perpetual FIFO Ending Inventory-Perpetual FIFO Perpetual Cost of Good Cost of Goods No of Cost Per Ending No of Unit FIFO Cost Per Unit No of Unit Cost Per Unit Available for Sale Unit Unit Inventory Sold June' 1 June' 3 $0.00 $109,250.00 1150 $95.00 210 210 1150 1360 370 $88.00 $18,480.00 $88.00 $18,480.00 $95.00 $109,250.00 $127,730.00 $95.00 $35,150.00 $0.00 June 9 $0.00 210 780 990 $88.00 $95.00 $18,480.00 $74,100.00 $92,580.00 June' 19 950 $112.00 $106,400.00 $0.00 370 950 1320 $95.00 $35,150.00 $112.00 $106,400.00 $141,550.00 $112.00 $38,640.00 June 29 $0.00 345 370 605 975 $95.00 $112.00 $35,150.00 $67,760.00 $102,910.00 $195,490.00 345 $38,640.00 2100 $215,650.00 1965 Total Ending Inventory Cost 345 $38,640.00

Ans2: Last in, first out method (LIFO): In this method it is assumed that Inventory which is purchased last will be sold first and the inventory will consist of old purchases. Cost of Goods Available for Sale Cost of Good Sold Perpetual LIFO Ending Inventory-Perpetual LIFO Perpetual Cost of Goods Cost of Good No of Cost Per Ending LIFO No of Unit Cost Per Unit No of Unit Cost Per Unit Available for Sale Sold Unit Unit Inventory June 1 June 3 $0.00 $109,250.00 $95.00 210 210 1150 1360 $88.00 $18,480.00 $88.00 $18,480.00 $95.00 $109,250.00 $127,730.00 June'9 $0.00 990 $95.00 $94,050.00 210 160 $88.00 $95.00 $18,480.00 $15,200.00 $33,680.00 370 June 19 950 $112.00 $106,400.00 $0.00 210 160 950 1320 210 135 345 $88.00 $18,480.00 $95.00 $15,200.00 $112.00 $106,400.00 $140,080.00 $88.00 $18,480.00 $95.00 $12,825.00 $31,305.00 June 29 $0.00 $112.00 $95.00 950 25 975 1965 $106,400.00 $2,375.00 $108,775.00 $202,825.00 21001 $215,650.00 Total Ending Inventory Cost 345 $31,305.00

Ans3: In weighted average cost method per unit purchase is derived by total cost of goods available for sale divided by total units of goods available at each transaction of sale or purchase Cost of Goods Available for Sale Cost of Good Sold Ending Inventory Perpetual Weighted Average Cost No of Unit Cost Per Unit Cost of Goods Available for Sale No of Unit Cost Per Unit Cost of Good Sold No of Unit Cost Per Unit Ending Inventory | June 1 June' 3 June 9 1150 $95.00 990 $93.9191 $0.00 $109,250.00 $0.00 $106,400.00 $0.00 $215,650.00 210 $88.00 $18,480.00 1360 $93.9191 $127,730.00 370 $93.9191 $34,750.00 1320 $106.9318 $141,150.00 345 $106.9318 $36,891.00 June 19 950 $92,980.00 $0.00 $104,259.00 $197,239.00 $112.00 June 29 $106.9318 975 1965 2100 Total Ending Inventory Cost 345 $36,891.00

1965 LIFO Ans 4 Date Unit Sale Price Total Sales June'9 990 $130.00 $128,700.00 June 29 975 $130.00 $126,750.00 Total $255,450.00 Welding Product Company Income Statement Particulars FIFO Avg. Cost Sales $255,450.00 $255,450.00 $255,450.00 Less: Cost of Good Sold ($195,490.00) ($202,825.00) ($197,239.00) Gross Profit $59,960.00 $52,625.00 $58,211.00 Less: Operating Expense ($21,600) ($21,600) ($21,600) Net Income Before Tax $38,360.00 $31,025.00 $36,611.00 Less: Tax @ 30% ($11,508.00) ($9,308.00) ($10,983.00) Net Income $26,852.00 $21,717.00 $25,628.00 Particulars FIFO LIFO Avg. Cost Income Tax Expense | $11,508.00 $9,308.00 $10,983.00 Ans 5 Gross Profit Ratio = Gross Profit/Sales Particulars FIFO L IFO Avg. Cost Gross Profit Ratio 23.47% 20.60% 22.79% [$59960/$255450] [$52625/$255450] [$58211/$255450] Inventory Turnover Ratio = Cost of Good Sold/ Average Invetory Average Inventory = (Beginning Inventory + Ending Inventory/2 Particulars FIFO LIFO Avg. Cost Beginning Inventory $18,480.00 $18,480.00 $18,480.00 Add: Ending Inventory $38,640.00 $31,305.00 $36,891.00 Total $57,120.00 $49,785.00 $55,371.00 Average Inventory $28,560.00 $24,892.50 $27,685.50 [$57120/2] ($49785/2] [$55371/21 Inventory Turnover Ratio 6.845 8.148 7.124 [$195490/$28560) ($202825/$24892.50) ($197239/$27685.50]