Inventory costing methods The purchases and issues of rubber gaskets (Materials
ID: 2460934 • Letter: I
Question
Inventory costing methods The purchases and issues of rubber gaskets (Materials Ledger #11216) as shown in the records of HD Corporation for the month of November follow: Units Unit Price Nov. 1 Beginning balance .................... 30,000 $3.00 4 Received, Rec. Report No. 112 ......... 10,000 3.10 5 Issued, Mat. Req. No. 49 ............... 30,000 8 Received, Rec. Report No. 113 ......... 50,000 3.30 15 Issued, Mat. Req. No. 50 ............... 20,000 22 Received, Rec. Report No. 114 ......... 25,000 3.50 28 Issued, Mat. Req. No. 51 ............... 30,000 Required: 1. Complete a materials ledger account similar to Figure 2-10 (the ‘‘On Order’’ columns should be omitted) for each of the following inventory costing methods, using a perpetual inventory system: a. FIFO b. LIFO c. Moving average (carrying unit prices to ve decimal places) 2. For each method, prepare a schedule that shows the total cost of materials transferred to Work in Process and the cost of the ending inventory. 3. If prices continue to increase, would you favor adopting the FIFO or the LIFO method? Explain. 4. When prices continue to rise, what is the effect of FIFO versus LIFO on the inventory balance for materials reported in the balance sheet? Discuss.
Explanation / Answer
a) FIFO
b) LIFO
c) Moving Average
2)
3) If a company that sells products finds the cost of its items increasing, the use of LIFO will result in less taxable income and less income tax payments than FIFO. Over a long period of time, or when costs increase dramatically, the lower income tax payments will be significant.
Another reason for a company to use the LIFO cost flow assumption is to improve the matching of costs with sales. Under LIFO, the recent costs will be matched on the income statement with the recent sales revenues.
4)
The effect under FIFO:
The cost of the closing inventory will be higher thereby increasing the current assets of the company. However, the net profit will also be higher therby increasing the owner's equity
The effect of LIFO:
The cost of the ending inventory will be lower in comparison to FIFO therby reducing the current assets in the balance sheet. The net profit will be lower thereby reducing the owner's equity in comparison to FIFO
Date Goods Purchased Cost of goods sold Inventory Balance No. Of units Cost perunit no. Of units cost per unit cost of goods sold no of units cost per unit ($) inventory balance 30000 @ 3.00 = 90000 10000 @ 3.1 10000 @ 3.10 = 31000 Total 40000 121000 30000 @ 3 = 90000 10000 @ 3.10 = 31000 Total 90000 10000 31000 50000 @ 3.3 10000 @ 3.10 = 31000 50000 @ 3.30 = 165000 Total 60000 196000 10000 @ 3.1 = 31000 40000 @ 3.30 = 132000 10000 @ 3.3 = 33000 Total 20000 64000 40000 132000 25000 @ 3.5 40000 @ 3.30 = 132000 25000 @ 3.50 = 87500 Total 65000 219500 439000 30000 @ 3.3 = 99000 10000 @ 3.30 = 33000 25000 @ 3.50 = 87500 Total 99000 35000 120500Related Questions
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