At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $10. A summary of purchases during the current period follows. During the period, Chen sold 2,800 units.

Units Unit Cost Cost
Beginning Inventory 1,000 $10 $10,000
Purchase #1 1,800 11 19,800
Purchase #2 800 13 10,400
Purchase #3 1,200 15 18,000

a. Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance.
b. Assume that Chen uses the average cost method. Compute both cost of good sold for the current period and the ending inventory balance.

a. Cost of Goods Sold under FIFO method - $ 29.800

   Ending inventory under FIFO method -     $ 28,400

b. Cost of Goods Sold under average cost method - $ 33,950

   Ending inventory under average cost method -     $ 24,250

Explanation:

                                                              Units     Unit Cost              Cost

Beginning Inventory                           1,000          $10               $10,000

Purchase #1                                          1,800         $ 11               $ 19,800

Purchase #2                                           800         $ 13              $ 10,400

Purchase #3                                         1,200         $ 15              $ 18,000          

Total available                                    4,800                            $ 58,200      

Units sold                                            ( 2,800)

Ending Inventory                                   2,000

Computations under FIFO method

In the FIFO method of cost flows, the cost of goods sold are considered from the opening inventory and the earlier purchases. The ending inventory is from the later purchases.

Cost of goods sold

Units sold                                            2,800

Opening inventory                             1,000 units @ $ 10          $ 10,000

Purchase # 1                                        1,800 units @ $ 11           $ 19,800

Total cost of Goods sold                                                           $ 29,800          

Ending Inventory

Units on hand                                      2,000

Purchase #2                                           800         $ 13              $ 10,400

Purchase #3                                         1,200         $ 15              $ 18,000          

Ending Inventory                                                                         $ 28,400

Computations under Average Cost method

Under average cost method, the cost of goods sold and the ending inventory is valued at the average cost of the goods available for sale divided by the number of units.

The average cost is calculated by dividing the total cost by the available units

Total Cost                                                       $ 58,200

Units available                                                     4,800

Average cost per unit                                    $      12.13    

Cost of goods sold = Units sold * Average cost = 2,800 * $ 12.13 =  $ 33,950

Ending Inventory- Units in hand * Average Cost = 2,000 * $ 12.13=  $ 24,250  

(a) The cost of goods sold is $29, 800

The cost of closing inventory is $28, 400

(b) Cost of goods sold = $11 x 2, 800

     = $30 ,800

Cost of closing inventory = 2, 000 x $11

    = $22, 000

Explanation:

Below is a table of the data provided in the question

                  Units           Unit Cost ($)            Cost ($)

Beginning   1, 000               10                     10, 000

Purchase #1   1, 800               11                     19, 800

Purchase #2    800               13                     10, 400

Purchase #3   1, 200               15                     18, 000

(a) First-In, First-Out (FIFO) method:

FIFO method is a method used for the calculation of the cost of goods sold. This method assumes that the oldest products in a company’s inventory are sold first. The cost paid for the oldest inventory is the one used to calculate the cost of goods sold.

How to calculate the cost of goods sold:

•determine the cost of your oldest goods sold

•multiply that amount by the number of units sold

(a)

Units sold2, 800Unit costCost  

Opening inventory1, 000$10$10, 000  

Purchase #11, 800$11$19, 800  

2, 800  $29, 800  

The cost of goods sold is $29, 800

Closing inventory:

Purchase #2          800      13       10, 400

Purchase #3         1, 200      15       18, 000

Total                                         28, 400

The cost of closing inventory is $28, 400

(b) Average Cost Method:

The average cost assigns a cost to inventory based on the total cost of goods purchased in a period divided by the total number of units purchased. This method is also known as the weighted average cost method.

How to calculate the cost of goods sold:

•find the average cost (divide the cost of all goods purchased, including opening inventory, by the number of goods on hand.

•Multiply that amount by the number of units sold

Average cost calculation:

               Units           Unit Cost ($)            Cost ($)

Beginning1, 000                  10                  10, 000

Purchase #11, 800                  11                  19, 800

Purchase #2800                          13                  10, 400

Purchase #31, 200                  15                   8, 000

Total         4, 800                                   52, 800

Average cost = $52, 800 / 4, 800

= $11

Therefore,  

Cost of goods sold = $11 x 2, 800

     = $30 ,800

Closing inventory units = 4, 800 – 2, 800

     = 2, 000 units

Cost of closing inventory = 2, 000 x $11

    = $22, 000

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