The following three identical units of Item A are purchased during April: Item A Units Cost
Apr. 2 Purchase 1 $68
Apr. 14 Purchase 1 73
28 Purchase 1 75
Total 3 $216
$72 ($216 / 3 units)

Assume that one unit is sold on April 27 for $403. Determine the gross profit for April and ending inventory on April 30 using the:

a. first-in, first-out (FIFO)
b. last-in, first-out (LIFO)
c. weighted average cost method.

1. Determination of Gross Profit:

Sales               $403

Cost of Sales     68

Gross profit  $335

2. Determination of Ending Inventory:

Apr. 14  Purchase 1   $73  

Apr. 28 Purchase 1     75

Ending Inventory 2 $148

1. Determination of Gross Profit:

Sales               $403  

Cost of Sales      75

Gross profit   $328

2. Determination of Ending Inventory:

Apr. 2  Purchase   1  $68

Apr. 14 Purchase   1  $73

Ending Inventory  2 $141

1. Determination of Gross Profit:

Sales              = $403.00

Cost of Sales =     70.50

Gross profit  = $332.50

2. Determination of Ending Inventory:

Ending inventory = 2 x $72.75 = $145.50

Explanation:

These three methods of inventory costing, FIFO, LIFO, and Weighted Average Cost Methods are techniques for assigning costs of products to the cost of goods sold and the ending inventory.  They produce different results.  FIFO assumes that units sold first are taken from the units purchased first, while LIFO assumes that units sold first are taken from the units purchased last.  On the other hand, the Weighted Average Method uses the average cost to determine the cost to allocate to cost of sales and ending inventory.  The average cost is obtained by summing the total inventory costs and dividing it by the units available for sale.  Then this average cost is applied to the quantity sold and the quantity remaining to obtain cost of goods sold and value of ending inventory.

The cost of goods sold under the Weighted Average Method is based on the average cost of $70.50 ($68 + 73)/2.  With the new purchase on April 28, the average cost now is $72.75 ($70.50 + $75)/2.  The Weighted Average Method does not assume the use of FIFO or LIFO in disposing of stock.  After the sale on April 24, the cost of the remaining unit is $70.50.  With the purchase on April 28, the weighted average cost becomes as calculated above.  Any other figure would have assumed that the April 28 purchase was done before the April 27 sale was recorded, which is illogical.

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