Chapter 11 – Inventory Cost Flow

Problem 11 – 1

Requirement 1

First in First out

First in – Jan. 1

Units Unit cost

Jan. 1 Balance on hand 6,000 150

5 Purchase 2,000 200

10 Sale 4,000*

15 Sale 1,000*

20 Purchase 2,500 300

25 Purchase 2,000 400

31 Sale 3,000**

Inventory (Jan. 1 to 5) = 8,000; Sold 5,000

*8,000 – 5,000 = 3,000 remaining

Purchases (Jan. 20 to 25) = 2,500 + 2,000 = 4,500

Balance = 3,000 + 4,500 = 7,500

**Sold 3,000

First in on Jan. 1 to 5 has 3,000 remaining, first in 3,000 sold out.

Remaining: January 20 & 25 Purchases

Units Unit cost Total cost

20 Purchase 2,500 300 750,000

25 Purchase 2,000 400 800,000

4,500 1,550,000

Ending inventory = [2,500 x 300] + [2,000 x 400] = 1,550,000

https://www.youtube.com/watch?v=H-053SIwnJ8 (FIFO)

- In a period of inflation or rising prices, the FIFO method would result to the highest net income.

As the time passed by, the price of goods is higher subsequently after purchase; the first purchase has a
minimum cost than the subsequent one, hence, when the company sell goods, the lower prices goods
he will be first sold and the remaining will have a higher prices. This remaining goods is ending inventory
that is a deduction to goods available for sale, the higher the deduction, the lowest the COGS, thus,
higher net income.

Requirement 2
4,500 units remaining x 228 = 1,026,000 (inventory cost at year-end)

Problem 11 – 2

Compute the inventory cost at year-end and cost of goods sold for the year following each method list
below:

3. Specific identification (assuming the inventory comes from Lot 3, 6,000 units, and Lot 4, 9,000 units)

Specific identification Units on hand Unit cost Total cost

Lot 3 6,000 120 720,000

4 9,000 100 900,000

15,000 1,620,000

Specific identification
Specific identification means that specific costs are attributed to identified items of inventory.

The cost of the inventory is determined by simply multiplying the units on hand by their actual unit cost.

This requires records which will clearly determine the actual costs of goods on hand.

PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated for a
specific project and inventories that are not ordinarily interchangeable.

The specific identification method may be used in either periodic or perpetual inventory system.

Goods available for sale Inventory – Dec. 31 Cost of goods sold

 FIFO 4,855,000 1,355,000 3,500,000

Weighted average 4,855,000 1,456,000 3,398,500

Specific identification 4,855,000 1,620,000 3,235,000

*Goods available for sale – Ending Inventory = COGS

Problem 11 – 4

*Date matters

Moving average

Units Unit cost Total cost

March 1 Beginning 1,000 270 270,000

6 Purchase 3,000 250 750,000

Total 4,000 255 1,020,000

March 9 Sale (2,000) 255 (510,000)

Total 2,000 255 510,000

March 14 Purchase 6,000 280 1,680,000

Total 8,000 273.5 2,190,000

March 25 Purchase 4,000 210 840,000

Total 12,000 252.5 3,030,000

March 31 Sale (8,000) 252.5 (2,020,000)

Total 4,000 252.5 1,010,000

Ending inventory = 1,010,000

Problem 11 – 6

To determine the total COGS of perpetual, add all sales.

Entry:
Debit: Cost of Sales
Credit: Inventory

Problem 11 – 9

“However, weighted average costs are used in valuing annual incremental layers.”

Raw materials, beginning + Net Purchases – Ending Inventory = Raw materials used

Problem 11 – 10

“The computation of COGS in each schedule is based on the following data”

: Total cost = 1,753,500

Sale per unit on Schedule 1 & 2 is given = 28,000 (2,800,000/100)

*Try first the FIFO.

The ending inventory of Weighted average method and Moving average method is not the same.

Problem 11 – 12

The method used before is Weighted Average

Now, assuming the entity used the FIFO method

2019:
Weighted average = 270,000
FIFO = 420,000

P150,000 difference

The Cost of goods sold is understated by 150,000. Add 150,000.

*Ending Inventory for the year is the Beginning Inventory for the next year.

Beginning inventory is overstated by 150,000. Net income is understated. Less 150,000 to decrease
COGS and to increase net income.

2019 2020 2021

Cost of goods sold - Average 1,500,000 2,000,000 2,400,000

 Understatement of ending inventory:

2019 (150,000) 150,000

2020 (200,000) 200,000

2021 ________ ________ (270,000)

Cost of goods sold – FIFO 1,350,000 1,950,000 2,330,000

2019: Ending inventory is understated. Magdeduct pa.

2020: Beginning inventory is understated. Mag-add pa.

Problem 11 – 18

Question 2

July 1 inventory 102,500

Purchases for July 200,000

Total units available for sale for July 302,500

July 31 inventory (60,000)

Units sold during month of July 242,500

Units sold and Cost of goods sold are the same.

Question 3

In computing the average cost, the computations include the beginning inventory.

Problem 11 – 20

The P100,000 clearing cost is capitalized to Lot C.

Capitalization is an accounting method in which a cost is included in the value of an asset and expensed
over the useful life of that asset, rather than being expensed in the period the cost was originally
incurred.

https://www.investopedia.com › terms › capitalization

Capitalization - To include in the cost of an asset

https://www.accountingcoach.com/terms/C/capitalize
--

Helpful Information:

https://courses.lumenlearning.com/boundless-accounting/chapter/valuing-inventory/