Inventory Accounting – Exercise With Answer No.2

Exercise Condition:

The units of an item available for sale during the year were as follows:

Jan 1 Inventory 27 units at $120

Feb 17 Purchase 54 units at $138

July 21 Purchase 63 units at $156

Nov 23 Purchase 36 units at $165

There are 50 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) FIFO, (b) LIFO and (c) the Average cost method.

Answer & Explanation:

1. FIFO – we assume that in closing inventory we have those units which were acquired at the latest date.

50 items left, they include:

  • Nov 23 purchase 36*$165=$5940

  • July 21 purchase 14 (50-36)*$156=$2184

Total FIFO closing inventory cost=$8124

2. LIFO – we assume that in closing inventory we have those units which were acquired at the earliest date.

50 items include:

  • Jan 1 opening inventory 27*$120=$3240

  • Feb 17 purchases 23 (50-27)*$138=$3174

Total LIFO closing inventory cost=$6414

3. Average price – we need to know average price of one unit. Calculate total units (in opening inventory and purchased during the period): 27+54+63+36=180

Calculate total cost of inventory:

  • 27*$120=$3240

  • 54*$138=$7452

  • 63*$156=$9828

  • 36*$165=$5940

  • Total=$26460

  • Average cost $26460/180=$147

Cost of closing inventory under average price method is 50*$147=$7350