formation about the Maxwell Company's inventory of one item during 2010 is given below.
Units Unit Cost
Beginning Inventory, Jan 1, 2010 80 $24.00
Purchases:
March, 2010 45 24.00
July 2010 75 22.00
Nov. 2010 100 21.00
Ending Inventory, Dec. 31, 2010 55
Compute the cost of the ending inventory and cost of goods sold under each of the following methods.
Average cost method
First in, first out (FIFO) method
Last in, first out (LIFO) method
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To compute the cost of the ending inventory and cost of goods sold using the average cost, FIFO, and LIFO methods, you need to follow these steps:
1. Calculate the total cost of goods available for sale:
Beginning Inventory: 80 units * $24.00/unit = $1,920.00
Purchases:
March: 45 units * $24.00/unit = $1,080.00
July: 75 units * $22.00/unit = $1,650.00
Nov.: 100 units * $21.00/unit = $2,100.00
Total cost of goods available for sale = $1,920.00 + $1,080.00 + $1,650.00 + $2,100.00 = $6,750.00
2. Average Cost Method:
Determine the average cost per unit by dividing the total cost of goods available for sale by the total number of units available:
Average cost per unit = Total cost of goods available for sale / Total number of units available
Average cost per unit = $6,750.00 / (80 + 45 + 75 + 100) = $6,750.00 / 300 = $22.50/unit
Cost of Goods Sold:
Cost of Goods Sold = Units sold * Average cost per unit
Cost of Goods Sold = (80 + 45 + 75 + 100 - 55) * $22.50/unit = 245 * $22.50 = $5,512.50
Cost of Ending Inventory:
Cost of Ending Inventory = Ending inventory units * Average cost per unit
Cost of Ending Inventory = 55 * $22.50/unit = $1,237.50
3. FIFO Method:
The idea behind the FIFO method is that the oldest units are assumed to be sold first, leaving the newest units in the ending inventory.
Cost of Goods Sold:
Calculate the cost of goods sold by multiplying the cost of the oldest units by the number of units sold chronologically until reaching the desired quantity:
Cost of Goods Sold = (Beginning Inventory * Cost per unit) + (March purchases * Cost per unit)
Cost of Goods Sold = (80 * $24.00/unit) + (45 * $24.00/unit) = $1,920.00 + $1,080.00 = $3,000.00
Cost of Ending Inventory:
The remaining units are assumed to be in the ending inventory, so we need to calculate the value of those units:
Cost of Ending Inventory = (July purchases * Cost per unit) + (Nov. purchases * Cost per unit) + (Ending Inventory * Cost per unit)
Cost of Ending Inventory = (75 * $22.00/unit) + (100 * $21.00/unit) + (55 * $21.00/unit) = $1,650.00 + $2,100.00 + $1,155.00 = $4,905.00
4. LIFO Method:
The LIFO method assumes that the most recently acquired units are sold first, leaving the oldest units in the ending inventory.
Cost of Goods Sold:
Calculate the cost of goods sold by multiplying the cost of the most recent units by the number of units sold chronologically until reaching the desired quantity:
Cost of Goods Sold = (Ending Inventory * Cost per unit) + (Nov. purchases * Cost per unit)
Cost of Goods Sold = (55 * $21.00/unit) + (100 * $21.00/unit) = $1,155.00 + $2,100.00 = $3,255.00
Cost of Ending Inventory:
The remaining units are assumed to be in the ending inventory, so we need to calculate the value of those units:
Cost of Ending Inventory = (Beginning Inventory * Cost per unit) + (March purchases * Cost per unit) + (July purchases * Cost per unit)
Cost of Ending Inventory = (80 * $24.00/unit) + (45 * $24.00/unit) + (75 * $22.00/unit) = $1,920.00 + $1,080.00 + $1,650.00 = $4,650.00
So, the cost of the ending inventory and cost of goods sold under each method are as follows:
- Average cost method: Ending Inventory = $1,237.50, Cost of Goods Sold = $5,512.50
- FIFO method: Ending Inventory = $4,905.00, Cost of Goods Sold = $3,000.00
- LIFO method: Ending Inventory = $4,650.00, Cost of Goods Sold = $3,255.00