In its first month of operations, Cisler Company made three purchases of merchandise in the following sequence:
(1) 300 units at $6,
(2) 400 units at $8, and
(3) 500 units at $9.
Assuming there are 200 units on hand at the end of the period, compute the cost of the ending inventory under
(a) The FIFO method and
(b) The LIFO method. Cisler uses a periodic inventory system.
I don't understand this method, so please help?
Sure! Let's start by understanding the FIFO and LIFO inventory methods.
FIFO stands for "First-In, First-Out," and it assumes that the first goods purchased are the first ones sold or used. In other words, the cost of the earliest purchases is allocated to the cost of goods sold first, while the cost of the most recent purchases is allocated to the ending inventory.
LIFO stands for "Last-In, First-Out," and it assumes that the last goods purchased are the first ones sold or used. This means that the cost of the most recent purchases is allocated to the cost of goods sold first, while the cost of the earliest purchases is allocated to the ending inventory.
Now let's calculate the cost of the ending inventory using the FIFO method:
1. Calculate the cost of goods sold (COGS) using the FIFO method:
- First, we assume that the first purchase (300 units at $6) is sold.
- The cost of goods sold for the first purchase would be 300 units x $6 = $1800.
- Next, we move to the second purchase (400 units at $8).
- However, since we have only sold 300 units, we deduct 300 units from the second purchase, leaving us with 100 units.
- The cost of goods sold for the second purchase would be 100 units x $8 = $800.
- Lastly, we move to the third purchase (500 units at $9).
- Since we still have 100 units from the second purchase, we deduct those units from the third purchase as well, leaving us with 400 units.
- The cost of goods sold for the third purchase would be 400 units x $9 = $3600.
- The cost of goods sold using the FIFO method is $1800 + $800 + $3600 = $6200.
2. Calculate the cost of the ending inventory using the FIFO method:
- We are given that there are 200 units of merchandise on hand at the end of the period.
- Since the most recent purchases are used for calculating the cost of goods sold, the earliest purchases are allocated to the ending inventory.
- The cost of the remaining 200 units from the first purchase (300 units) would be 200 units x $6 = $1200.
- Therefore, the cost of the ending inventory using the FIFO method is $1200.
Now let's calculate the cost of the ending inventory using the LIFO method:
1. Calculate the cost of goods sold (COGS) using the LIFO method:
- Since LIFO assumes that the last goods purchased are the first ones sold, we start with the third purchase (500 units at $9).
- 200 units from the third purchase are allocated to the cost of goods sold, leaving us with 300 units.
- The cost of goods sold for the third purchase would be 200 units x $9 = $1800.
- Next, we move to the second purchase (400 units at $8).
- Deducting the remaining 300 units from the third purchase, we allocate 100 units from the second purchase to the cost of goods sold.
- The cost of goods sold for the second purchase would be 100 units x $8 = $800.
- Lastly, we move to the first purchase (300 units at $6).
- As we have already accounted for the sales from the first two purchases, we allocate the entire first purchase to the cost of goods sold.
- The cost of goods sold for the first purchase would be 300 units x $6 = $1800.
- The cost of goods sold using the LIFO method is $1800 + $800 + $1800 = $4400.
2. Calculate the cost of the ending inventory using the LIFO method:
- With the LIFO method, the cost of the ending inventory is associated with the earliest purchases.
- Since the 200 units on hand at the end of the period are assumed to be from the second purchase (400 units at $8), we allocate the cost of those 200 units to the ending inventory.
- The cost of the ending inventory using the LIFO method is 200 units x $8 = $1600.
To summarize:
(a) The cost of the ending inventory under the FIFO method is $1200.
(b) The cost of the ending inventory under the LIFO method is $1600.