Question

A toy store has beginning inventory of 20 plastic bouncy balls at a cost of $1.05 each. During the year the toy store purchased 2 at $1.40; 4 at $2.00; 6 at $3.00; and 20 at $4.00. By the end of the year, 25 sets were sold.

Calculate the following:

1. the number of plastic bouncy balls in stock at the end of the year,
2. the cost of ending inventory under LIFO,
3. the cost of ending inventory under FIFO, and
4. the cost of ending inventory under weighted average.

Answer 1

Answer A

Total number of bouncy ball in stock at the year end is the closing stock. The formula to calculate closing stock is as follows

Closing Stock = Opening Stock + Purchases - Sales
= 20 + (2+4+6+20) - 25
= 27 Bouncy Balls

Answer B

LIFO is the last in first out method of valuation of inventory, Last in first out will eliminate the latest purchase which has been done for the product with the sales. Basically, we will have to start from the bottom.

Valuation will be as follows:

	Quantity	Rate	Total Amount
Opening	20	1.05	21.00
Purchase 1	2	1.40	2.80
Purchase 2	4	2.00	8.00
Purchase 3	6	3.00	18.00
Purchase 4	20	4.00	80.00
Total	52		129.80
Sales	25
	Quantity	Rate	Total Amount
Issued From Purchase 4	20	4.00	80.00
Issued From Purchase 3	5	3.00	15.00
Total	25		95.00
Closing Inventory	27	1.29	35

We have issued the inventory from the latest stock i.e. purchase 4 then we will move upwards to purchase 3, purchase 2 and so on till the number of units sold are reached. Closing Inventory formula is same as in answer stated above.

Answer C

We will use the same mechanism which used in LIFO but instead of issuing from the latest purchase, we will issue the stock from earlier purchase.

Valuation as per FIFO will be as follows

	Quantity	Rate	Total Amount
Opening	20	1.05	21.00
Purchase 1	2	1.40	2.80
Purchase 2	4	2.00	8.00
Purchase 3	6	3.00	18.00
Purchase 4	20	4.00	80.00
Total	52		129.80
Sales	25
	Quantity	Rate	Total Amount
Issued From Opening Stock	20	1.05	21.00
Issued From Purchase 1	2	1.40	2.80
Issued From Purchase 2	3	2.00	6.00
Total	25		29.80
Closing Inventory	27	3.70	100

It is quite clear in FIFO where in one issues the stock in the same hierarchy that they have purchased.

Answer D

Weighted Average method is the one where average cost of product is calculate at each purchase according to its quantity and a uniform rate for the stock is maintained throughout the period.

Valuation as per Weighted Average will be as follows

	Quantity	Rate	Total Amount	Cumulative Amount	Cumulative Quantity	Avg. Rate
Opening	20	1.05	21.00	21.00	20	1.05
Purchase 1	2	1.40	2.80	23.80	22	1.08
Purchase 2	4	2.00	8.00	31.80	26	1.22
Purchase 3	6	3.00	18.00	49.80	32	1.56
Purchase 4	20	4.00	80.00	129.80	52	2.50
Total	52		129.80
	Quantity	Rate	Total Amount
Sales	25	2.50	62.50
	Quantity	Rate	Total Amount
Closing Inventory	27	2.50	67.40

You can see that as per the weighted average method we have added new columns, as we have to take running balance, we need to take the cumulative amount and quantity to determine the average rate. The average rate so determined finally, in this case $2.50 will be used for issue and closing stock valuation purpose