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

Question

Line Item Description Units and Cost
Beginning inventory 20 units at $46
Sale 13 units at $69
First purchase 24 units at $48
Sale 12 units at $70
Second purchase 27 units at $49
Sale 20 units at $72
The firm uses the perpetual inventory system, and there are 26 units of the item on hand at the end of the year.

a. What is the total cost of the ending inventory according to FIFO?
b. What is the total cost of the ending inventory according to LIFO?

Answer 1

To calculate the total cost of the ending inventory using both FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) methods, we need to track the inventory activity step by step.

Given Inventory Transactions:

• Beginning Inventory: 20 units at $46 each
• First Sale: 13 units sold (at $69)
• First Purchase: 24 units at $48 each
• Second Sale: 12 units sold (at $70)
• Second Purchase: 27 units at $49 each
• Third Sale: 20 units sold (at $72)

Total Units Available:

• Beginning Inventory: 20
• First Purchase: 24
• Second Purchase: 27
• Total Available: 20 + 24 + 27 = 71 units

Total Units Sold:

• First Sale: 13 units
• Second Sale: 12 units
• Third Sale: 20 units
• Total Sold: 13 + 12 + 20 = 45 units

Units Remaining:

• Units on Hand at End of Year: 71 (available) - 45 (sold) = 26 units

a. FIFO Method (First-In, First-Out)

Under FIFO, we assume that the oldest inventory items are sold first.

1. Sales Analysis:

   • First Sale (13 units): From Beginning Inventory (20 units at $46)
     • 13 units at $46 = \( 13 \times 46 = 598 \)
   • Second Sale (12 units): From remaining Beginning Inventory and First Purchase
     • First, 7 units from Beginning Inventory (20 - 13 = 7 units left at $46):
       • 7 units at $46 = \( 7 \times 46 = 322 \)
     • Then, take 5 units from First Purchase (24 units at $48 each)
       • 5 units at $48 = \( 5 \times 48 = 240 \)
     • Total for Second Sale: \( 322 + 240 = 562 \)
   • Third Sale (20 units): From the remaining First Purchase and Second Purchase
     • Remaining from First Purchase (24 - 5 = 19 units left at $48)
       • 19 units at $48 = \( 19 \times 48 = 912 \)
     • Then, take 1 unit from Second Purchase (27 units at $49 each):
       • 1 unit at $49 = \( 1 \times 49 = 49 \)
     • Total for Third Sale: \( 912 + 49 = 961 \)

2. Ending Inventory Calculation (FIFO): After selling 45 units, the remaining inventory consists of:

   • From Second Purchase: 27 units - 1 unit sold = 26 units (at $49)
   • Thus, 26 units left at:
     • 26 * $49 = \( 26 \times 49 = 1274 \)

Total Cost of Ending Inventory (FIFO): $1,274

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b. LIFO Method (Last-In, First-Out)

Under LIFO, we assume that the newest inventory items are sold first.

1. Sales Analysis:

   • Third Sale (20 units): From Second Purchase (27 units at $49 each)
     • 20 units at $49 = \( 20 \times 49 = 980 \)
   • Second Sale (12 units): From remaining Second Purchase
     • Remaining from Second Purchase (27 - 20 = 7 units left at $49):
       • 12 units needed; thus 7 units from Second Purchase and 5 from First Purchase (24 units at $48):
       • 7 units at $49 = \( 7 \times 49 = 343 \)
       • 5 units at $48 = \( 5 \times 48 = 240 \)
     • Total for Second Sale: \( 343 + 240 = 583 \)
   • First Sale (13 units): From remaining First Purchase
     • Remaining from First Purchase (24 - 5 = 19 units at $48):
       • 13 units at $48 = \( 13 \times 48 = 624 \)

2. Ending Inventory Calculation (LIFO): After selling 45 units, the remaining inventory consists of:

   • From Beginning Inventory: 20 units (at $46)
   • From First Purchase: 6 units (remaining from 19 units after selling 13)
   • Total remaining:
     • 20 units at $46 + 19 units at $48
     • Ending Inventory:
       • 20 * $46 = \( 20 \times 46 = 920 \)
       • 6 * $48 = \( 6 \times 48 = 288 \)

Total Cost of Ending Inventory (LIFO): $1,208

Summary:

• Total Cost of Ending Inventory (FIFO): $1,274
• Total Cost of Ending Inventory (LIFO): $1,208