Inventory Accounting – Exercise With Answer No.3

Exercise Condition:

The company produces a product with the following costs as of July 1, 2009:

Material: $6

Labor: $4

Overhead: $2

Beginning inventory at these costs on July 1 was 5,000 units. From July1 to Dec.1, Convex produced 15,000 units. These units had a material cost of $10 per unit. The costs for labor and overhead were the same. The company uses FIFO inventory accounting method.

Assuming that the company sold 17,000 units during the last six months of the year for $20 each, calculate gross profit and value of ending inventory.

Answer & Explanation:

In case we apply FIFO inventory accounting method, first we sell those goods which were manufactured at the earliest date, i.e. from the beginning inventory.

Beginning inventory one item cost is $6+$4+$2=$12

Manufactured inventory one item cost is $10+$4+$2=$16

1. Calculate cost of goods sold, i.e. 17000 items

a. First we include into the sold units 5000 units from the beginning inventory, 5000*$12=$60000

b. Then remaining items, i.e. 17000-5000=12000 go from manufactured items, i.e. cost of these items sold is 12000*$16=$192000

Total cost of goods sold $60000+$192000=$252000

Gross profit is 17000*$20-$252000=$88000

2. To calculate cost of closing inventory, we know that 3000 items (15000-12000) remain in closing inventory after the sale was made. Cost of one item is $16. So total value of inventory is 3000*$16=$48000