Inventory Accounting – Exercise With Answer No.1

Exercise Condition:

Balance of inventory on hand is the following (acquisition date, quantity and unit price are indicated):

  • Dec. 7 – 10 units @ $6 cost;

  • Dec 14 – 20 units @ $12 cost;

  • Dec. 21 – 15 units @ $14 cost.

Trader sells 15 units for $25 each on Dec. 15. Eight of the sold units are from the Dec. 7 purchase and seven are from the Dec. 14 purchases.

Calculate Cost of Goods Sold on Dec. 15 applying FIFO, LIFO and Average price methods.

Answer & Explanation:

1. FIFO – calculating cost of goods sold we assume that first we sell those items which were acquired at the earliest time.

Sale occurred on Dec 15. We should consider only those items which were acquired on Dec 7 and Dec 14.

Quantity sold is 15 units.

For FIFO we first have to sell those units which were acquired at the earliest time, i.e. Dec 7. It is all 10 units being sold.

Since 15 units were sold, 5 more units have to be taken from Dec 14 purchases.

So cost of goods sold under FIFO is:
10*$6+5*$12=$120

2. LIFO is contrary to FIFO. We assume that first we sell those items which were acquired at the latest time.

Sale occurred on Dec 15, we do not take into account Dec 21 purchases.

Therefore we sell 15 items from those which were acquired on Dec 14 (this is the latest acquisition date before the sale date). There is not need to look into other purchases since on December 14 20 units were acquired and it is enough to calculate cost of goods sold,

i.e. 15 units*$12=$180

3. Average cost – we do not look into the particular acquisition date, but calculate average cost of all unites which we had before the sale date.

Sale is on Dec 15, before that time we had 10 units*$6=$60 and 20 units*$12=$240. Total units 30, total cost $300. Average price of one unit is 300/30=$10. Again we skip purchases as of Dec 21, since the sale was made before that date.

Cost of goods sold is 15 units*$10=$150