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! I'll explain how to calculate the cost of ending inventory under the FIFO and LIFO methods using the given information.
FIFO stands for "First-In, First-Out." Under this method, it is assumed that the items purchased first are sold first. Therefore, the cost of the items remaining in inventory is based on the most recent purchases.
LIFO stands for "Last-In, First-Out." This method assumes that the most recent purchases are sold first, so the cost of the items remaining in inventory is based on the earliest purchases.
In your case, we'll calculate the cost of the ending inventory using both methods.
(a) FIFO Method:
To calculate the cost of ending inventory using the FIFO method, we need to determine which units were sold and which were left in inventory. Based on the information provided, we know that there were 200 units on hand at the end of the period.
Step 1: Calculate the number of units sold.
To find the number of units sold, we need to subtract the units on hand from the sum of all purchases:
Total purchases = 300 + 400 + 500 = 1200 units
Units sold = Total purchases - Units on hand = 1200 - 200 = 1000 units
Step 2: Calculate the cost of units sold.
To find the cost of units sold, we multiply the number of units sold by the cost per unit from the earliest purchases:
Cost of units sold = Units sold * Cost per unit from earliest purchase
= 1000 * $6 (from the first purchase)
= $6000
Step 3: Calculate the cost of the ending inventory.
To find the cost of the ending inventory, we multiply the units on hand by the cost per unit from the most recent purchase:
Cost of ending inventory = Units on hand * Cost per unit from the most recent purchase
= 200 * $9 (from the third purchase)
= $1800
Therefore, the cost of the ending inventory under the FIFO method is $1800.
(b) LIFO Method:
To calculate the cost of ending inventory using the LIFO method, we follow the same steps as above, but this time, we assume the most recent purchases are sold first.
Step 1: Calculate the number of units sold (same as in the FIFO method)
Units sold = Total purchases - Units on hand = 1200 - 200 = 1000 units
Step 2: Calculate the cost of units sold.
To find the cost of units sold, we multiply the number of units sold by the cost per unit from the most recent purchases:
Cost of units sold = Units sold * Cost per unit from the most recent purchase
= 1000 * $9 (from the third purchase)
= $9000
Step 3: Calculate the cost of the ending inventory.
To find the cost of the ending inventory, we multiply the units on hand by the cost per unit from the earliest purchase:
Cost of ending inventory = Units on hand * Cost per unit from the earliest purchase
= 200 * $6 (from the first purchase)
= $1200
Therefore, the cost of the ending inventory under the LIFO method is $1200.
I hope this explanation helps you understand how to calculate the cost of ending inventory using the FIFO and LIFO methods! Let me know if you have any further questions.