Speed World Cycles sells high-performance motorcycles and motocross racers. One
ID: 2561191 • Letter: S
Question
Speed World Cycles sells high-performance motorcycles and motocross racers. One of Speed World's most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs: Aug. 3 402 000 On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World's fiscal year Assume that Speed World uses a periodic inventory system. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions: Weighted average cost FIFO Show the number of units and unit costs in each cost layer of the ending inventory. You may determine the cost of goods sold by deducting ending inventory from the cost of goods available for sale. (Omit the "$" sign in your response.) Weighted average cost Ending inventory Cosil of goods sold hrough September 30 Cost of goods available for sale Less: Ending inventory at Seplember 30 (above) Cest of goods sold Ending inventory at Sephember 30 From purchase on August 3 From purchane on July 22 Cost of goods sold through September 30 Cost of goods available for sale Less Ending inventory at September 30 (above) Cost of goods sold ReferencesExplanation / Answer
Solution:
Periodic Inventory Syste
It is a system of inventory in which inventories are updated on a periodic basis. Periodic basis may be monthly, quarterly, weekly, half yearly or yearly. In this system, inventories are not kept up to date.
a.1) Cost of Goods Sold and Ending Inventory using Weighted Average Cost method
Weighted Average Method
Under weighted average method, the average cost per unit is calculated and the calculated average cost is applied to the units sold in order to find out cost of goods sold.
Average Unit Cost = Total Cost of material available for sale / total quantity of material available for sale
Cost of Goods Sold = Sold Units x Average Unit Cost
Total Units Available for Sale = 8 Units
Total Cost of Units Available for Sale = $402,000
Average Unit Cost = Total Cost of material available for sale $402,000 / total quantity of material available for sale 8 Units
= $50,250
Total Unit Sold = 4 Units
Cost of Goods Sold = Sold Units 4 x Average Unit Cost $50,250 = $201,000
Units of Ending Inventory = Total Units Available for Sale – Units Sold = 8 – 4 = 4 Units
Ending Inventory at September 30:
Weighted Average Cost
$50,250
Ending Inventory (4 Units x $50,250)
$201,000
Cost of Goods Sold through September 30:
Cost of Goods Available for sale
$402,000
Less: Ending Inventory at September 30 (above)
($201,000)
Cost of Goods Sold
$201,000
a.2) Cost of Goods Sold and Ending Inventory using FIFO Method
Under FIFO method the oldest units are issued first.
Ending Inventory at September 30:
From purchase on August 3 (3 Units x $51,000)
$153,000
From purchase on July 22 (1 Unit x $50,000)
$50,000
$203,000
Note --- Total Units Available 8 Units and the total sold units 4 units. Hence the Units of Ending Inventory is 4 Units. FIFO method says that the oldest units are sold first. Hence the units from purchase on July 1 sold first total 3 units and from purchase on July 22 sold 1 unit.
Cost of Goods Sold through September 30:
Cost of Goods Available for sale
$402,000
Less: Ending Inventory at September 30 (above)
($203,000)
Cost of Goods Sold
$199,000
b(1) --- FIFO cost flow assumption will result the highest profit for the current year.
Explanation – Since the cost of goods sold under FIFO method is less than Average Method. The profit in FIFO method will be higher.
B(2) --- not understand this part…Pls check the options.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Ending Inventory at September 30:
Weighted Average Cost
$50,250
Ending Inventory (4 Units x $50,250)
$201,000
Cost of Goods Sold through September 30:
Cost of Goods Available for sale
$402,000
Less: Ending Inventory at September 30 (above)
($201,000)
Cost of Goods Sold
$201,000
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