Topanga Group began operations early in 2018. Inventory purchase information for

Question

Topanga Group began operations early in 2018. Inventory purchase information for the quarter ended March 31, 2018, for Topanga's only product is provided below. The unit costs include the cost of freight. The company uses a periodic inventory system.

Sales for the quarter, all at $7.00 per unit, totaled 20,000 units leaving 14,000 units on hand at the end of the quarter.

Required:
1. Calculate Topanga's cost of goods sold for the first quarter using:

FIFO

LIFO

Average cost

2. Calculate Toponga's gross profit ratio for the first quarter using FIFO, LIFO, and Average cost.
3. Comment on the relative effect of each of the three inventory methods on the gross profit ratio.

Date of Purchase Units Unit Cost Total Cost Jan. 7 5,000 $ 4.00 $ 20,000 Feb. 16 12,000 4.50 54,000 March 22 17,000 5.00 85,000 Totals 34,000 159,000

Explanation / Answer

1. Cost of goods sold under FIFO = (5000*4)+(12000*4.5)+(3000*5) = $89000

Cost of goods sold under LIFO = (17000*5)+ (3000**4.5)= $98500

Cost of goods sold under Average cost =(159000/34000)*20000 = $93529

2. Gross Profit under FIFO = 140000-89000 = $51000

Gross Profit under LIFO = 140000-98500 = $41500

Gross profit under weighted average = 140000- 93529 = $46471

3.Grosss profit under fifo is highest since the cost of goods sold is lowest as the prices tend to rise over time. hence, profit is highest under fifo. Vice versa, it is lowest under LIFO as the most recent stock is used for calculating cost of goods sold.

Looking forward to your upvote..

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