Question

In its fi rst month of operations, Bethke Company made three purchases of merchandise

in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 200 units at $8.

Assuming there are 360 units on hand, compute the cost of the ending inventory under the

(a) FIFO method and (b) LIFO method. Bethke uses a periodic inventory system.

Answer 1

Correct answers are:

(a) $2,720

(b) $2,220

Explanation:

(a) FIFO method:

Under the FIFO method, the earliest goods purchased are the first ones removed from the inventory account. Hence 360 units in closing Inventory will compromise 200 units purchased at $8 per unit and 160 units purchased at $7 per unit.

Ending inventory = 360 units

Cost of ending Inventory:

= 200 units at $8 + 160 units at $7

= (200 * $8) + (160 * $7)

= 1,600 + 1,120

= $2,720

(b) LIFO method

Under LIFO, the cost of the most recent products purchased/produced are the first to be expensed. Hence 360 units in closing Inventory will compromise 300 units purchased at $6 per unit and 60 units purchased at $7 per unit.

Cost of ending Inventory:

= 300 units at $6 + 60 units at $7

= (300 * $6) + (60 * $7)

= 1,800 + 420

= $2,220