Question

The Reuschel Company began 2018 inventory with 25,000 units at a cost of $8 per unit. During 2018, 65,000 units were purchased for $10.30 each. Sales for the year totaled 76,500 units leaving 13,500 units on hand at the end of 2018. Reuschel uses the periodic inventory systems and the LIFO inventory cost method.

REQUIRED:

1) Calculate COGS for 2018.

2) Calculate the effect of the LIFO on the income.

Answer 1

• [1]
  Cost of Goods Sold:
  units sold = 76500 units
  >Cost of goods sold for 65000 units = 65000 x $ 10.30 = $ 669,500
  >Cost of Goods sold for remaining 11500 units = 11500 x $ 8 = $ 92,000

Total cost of goods sold = 669500 + 92000 = $ 761,500

• [2]
  Effect of LIFO on the Income:
  >Prices are rising (from $ 8 to $ 10.30)
  >This will lead to MORE cost of goods sold amount and ending inventory being understated under LIFO.
  >As a result, Gross Profit or Net Income will be LOWER or understated.