Question

In its first month of operation, Windsor, Inc. purchased 320 units of inventory for $4, then 420 units for $5, and finally 360 units for $6. At the end of the month, 400 units remained. Compute the amount of phantom profit that would result if the company used FIFO rather than LIFO.

Answer 1

Cost of goods available for sale

Units	Unit cost	Total cost
320	$4	$1,280
420	$5	$2,100
360	$6	$2,160
1,100		$5,540

Ending inventory = 400 units

FIFO method

As per FIFO, ending inventory would comprise of 360 units of $6 per unit and 40 units of $5 per unit.

Cost of ending inventory = 360 x 6 + 40 x 5

= 2,160 + 200

= $2,360

Cost of goods sold = Cost of goods available for sale - Cost of ending inventory

= $5,540 - $2,360

= $3,180

LIFO method

As per LIFO, ending inventory would comprise of 320 units of $4 per unit and 80 units of $5 per unit.

Cost of ending inventory = 320 x 4 + 80 x 5

= 1,280 + 400

= $1,680

Cost of goods sold = Cost of goods available for sale - Cost of ending inventory

= $5,540 - $1,680

= $3,860

Phantom profit = Cost of goods sold as per LIFO - Cost of goods sold as per FIFO

= $3,860 - $3,180

= $680