Dymac Appliances uses the periodic inventory system. Details regarding the inventory of appliances at January 1, purchases invoices during the next 12 months, and the inventory
count at December 31 are summarized as follows:
Purchases Invoices Model Inventory, November 1 1st 2nd 3rd Inventory Count, October 31 A10 __ 4 at $ 64 4 at $ 70 4 at $ 76 6 B15 8 at $176 4 at 158 3 at 170 6 at 184 8 E60 3 at 75 3 at 65 15 at 68 9 at 70 5 G83 7 at 242 6 at 250 5 at 260 10 at 259 9 J34 12 at 240 10 at 246 16 at 267 16 at 270 15 M90 2 at 108 2 at 110 3 at 128 3 at 130 5 Q70 5 at 160 4 at 170 4 at 175 7 at 180 8
Instructions
1. Determine the cost of the inventory on December 31 by the first-in, first-out method. Present data in columnar form, using the following headings:
Model Quantity Unit Cost Total Cost
If the inventory of a particular model comprises one entire purchase plus a portion of another purchase acquired at a different unit cost, use a separate line for each purchase.
2. Determine the cost of the inventory on December 31 by the last-in, first-out method, following the procedures indicated in (1).
3. Determine the cost of the inventory on December 31 by the weighted average cost method, using the columnar headings indicated in (1).
4. Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.
Answer:
1. First-In, First-Out Method
Model Quantity Unit Cost Total Cost
A10 4 $ 76 $ 304
2 70 140
B15 6 184 1,104
2 170 340
E60 5 70 350
G83 9 259 2,331
J34 15 270 4,050
M90 3 130 390
2 128 256
Q70 7 180 1,260
1 175 175
Total$10,700
2. Last-In, First-Out Method
Model Quantity Unit Cost Total Cost
A10 4 $ 64 $ 256
2 70 140
B15 8 176 1,408
E60 3 75 225
2 65 130
G83 7 242 1,694
2 250 500
J34 12 240 2,880
3 246 738
M90 2 108 216
2 110 220
1 128 128
Q70 5 160 800
3 170 510
Total$9,845
3. Weighted Average Cost Method
Quantity Unit Cost* Total Cost
6 $ 70 $ 420
8 174 1,392
5 69 345
9 253 2,277
15 258 3,870
5 121 605
8 172 1,376
* Computations of unit costs:
A10: $70 = [(4 × $64) + (4 × $70) + (4 × $76)] ÷ (4 + 4 + 4)
B15: $174 = [(8 × $176) + (4 × $158) + (3 × $170) + (6 × $184)] ÷ (8 + 4 + 3 + 6)
E60: $69 = [(3 × $75) + (3 × $65) + (15 × $68) + (9 × $70)] ÷ (3 + 3 + 15 + 9)
G83: $253 = [(7 × $242) + (6 × $250) + (5 × $260) + (10 × $259)] ÷ (7 + 6 + 5 + 10)
J34: $258 = [(12 × $240) + (10 × $246) + (16 × $267) + (16 × $270)] ÷ (12 + 10 + 16 + 16)
M90: $121 = [(2 × $108) + (2 × $110) + (3 × $128) + (3 × $130)] ÷ (2 + 2 + 3 + 3)
Q70: $172 = [(5 × $160) + (4 × $170) + (4 × $175) + (7 × $180)] ÷ (5 + 4 + 4 + 7)
4. a. During periods of rising prices, the LIFO method will result in a lower cost
of inventory, a greater amount of cost of merchandise sold, and less net
income than the other two methods. For Dymac Appliances, the LIFO method
would be preferred for the current year because it would result in less income
tax.
b. During periods of declining prices, the FIFO method will result in less net
income and would be preferred for income tax purposes.