Eddings Company had a beginning inventory of 400 units of Product XNA at a cost of $8.00 per unit. During the year, purchases were:
Feb. 20 600 units at $9 Aug. 12 300 units at $11
May 5 500 units at $10 Dec. 8 200 units at $12
Eddings Company uses a periodic inventory system. Sales totaled 1,500 units.
Determine the cost of goods available for sale
Determine (1) the ending inventory, and (2) the cost of goods sold under each of the assumed cost flow methods (FIFO, LIFO, and average). Prove the accuracy of the cost of goods sold under the FIFO and LIFO methods.
To determine the cost of goods available for sale, you need to calculate the total cost of the beginning inventory and all purchases:
Beginning inventory: 400 units at $8 per unit = $3,200
Feb. 20: 600 units at $9 per unit = $5,400
May 5: 500 units at $10 per unit = $5,000
Aug. 12: 300 units at $11 per unit = $3,300
Dec. 8: 200 units at $12 per unit = $2,400
Total cost of goods available for sale: $3,200 + $5,400 + $5,000 + $3,300 + $2,400 = $19,300
To determine the ending inventory and the cost of goods sold under FIFO, LIFO, and average cost methods, we need to know the number of units sold. In this case, it is given that sales totaled 1,500 units.
1. FIFO (First-In, First-Out) Method:
Under FIFO, the oldest units are sold first, and the costs associated with the oldest units are used to calculate the cost of goods sold.
Ending inventory: The remaining units after sales = Beginning inventory + Purchases - Sales
= 400 + 600 + 500 + 300 + 200 - 1,500
= 500 units
Cost of goods sold: Units sold * Cost per unit
= 1,500 units * Cost per unit (First-in)
= 1,500 units * $8 = $12,000
2. LIFO (Last-In, First-Out) Method:
Under LIFO, the most recent units are sold first, and the costs associated with the most recent units are used to calculate the cost of goods sold.
Ending inventory: The remaining units after sales = Beginning inventory + Purchases - Sales
= 400 + 600 + 500 + 300 + 200 - 1,500
= 300 units
Cost of goods sold: Units sold * Cost per unit
= 1,500 units * Cost per unit (Last-in)
= 1,500 units * $12 = $18,000
3. Average Cost Method:
Under the average cost method, the cost of goods sold and ending inventory are calculated using the average cost per unit based on the total cost of goods available for sale.
Average cost per unit = Total cost of goods available for sale / Total units available for sale
= $19,300 / (400 + 600 + 500 + 300 + 200)
= $19,300 / 2,000
= $9.65 per unit (rounded to two decimal places)
Ending inventory: The remaining units after sales = Beginning inventory + Purchases - Sales
= 400 + 600 + 500 + 300 + 200 - 1,500
= 500 units
Cost of goods sold: Units sold * Average cost per unit
= 1,500 units * $9.65 = $14,475
To prove the accuracy of the cost of goods sold under the FIFO and LIFO methods, you can cross-check the calculations and ensure that they align with the assumptions of each method.