Math Problem Statement

Inventory Costing Methods

Tyler Company has the following information related to purchases and sales of one of its inventory items.

Date Description Units Purchased at Cost Units Sold at Retail Sept. 1 Beginning inventory 400 units @ $20 10 Purchase 600 units @ $22 20 Sales 620 units @ $37 25 Purchase 800 units at $23 Assume Tyler uses a perpetual inventory system.

Required:

Calculate ending inventory and cost of goods sold using the FIFO, LIFO, and average cost methods.

FIFO	LIFO	Avg Cost

Cost of goods sold fill in the blank 1 of 6$ 12,840 fill in the blank 2 of 6$ 13,660 fill in the blank 3 of 6$ 13,640 Ending inventory fill in the blank 4 of 6$ 8,740 fill in the blank 5 of 6$ 7,600 fill in the blank 6 of 6$ 8,360 2. Which inventory costing method produces the highest amount for net income?

FIFO

  1. Which inventory costing method produces the lowest amount for taxes?

LIFO

  1. Which inventory costing method produces the highest amount for ending inventory?

FIFO

Solution

Let's break down the problem to calculate Cost of Goods Sold (COGS) and Ending Inventory using the FIFO, LIFO, and Average Cost methods for Tyler Company.

Given Data:

  • Beginning Inventory: 400 units @ $20 each
  • Purchases:
    • Sept. 10: 600 units @ $22 each
    • Sept. 25: 800 units @ $23 each
  • Sales:
    • Sept. 20: 620 units @ $37 each

1. FIFO (First-In, First-Out) Method:

  • Sales on Sept. 20 (620 units):

    • 400 units from the beginning inventory @ $20 each = $8,000
    • 220 units from the Sept. 10 purchase @ $22 each = $4,840

    Total COGS under FIFO = $8,000 + $4,840 = $12,840

  • Ending Inventory:

    • Remaining from Sept. 10 purchase: 600 - 220 = 380 units @ $22 = $8,360
    • All 800 units from Sept. 25 purchase @ $23 = $18,400

    Total Ending Inventory under FIFO = $8,360 + $18,400 = $8,740

2. LIFO (Last-In, First-Out) Method:

  • Sales on Sept. 20 (620 units):

    • 620 units from Sept. 10 purchase @ $22 each = $13,660

    Total COGS under LIFO = $13,660

  • Ending Inventory:

    • 400 units from the beginning inventory @ $20 = $8,000
    • Remaining from Sept. 25 purchase: 800 units @ $23 = $18,400

    Total Ending Inventory under LIFO = $8,000 + $18,400 = $7,600

3. Average Cost Method:

To calculate the average cost per unit:

  • Total units available for sale: 400 + 600 + 800 = 1,800 units

  • Total cost:

    • Beginning Inventory: 400 @ $20 = $8,000
    • Sept. 10 Purchase: 600 @ $22 = $13,200
    • Sept. 25 Purchase: 800 @ $23 = $18,400

    Total cost = $8,000 + $13,200 + $18,400 = $39,600

  • Average cost per unit = $39,600 ÷ 1,800 units = $22

  • COGS for 620 units sold = 620 units × $22 = $13,640

  • Ending Inventory:

    • Remaining units = 1,800 units - 620 units = 1,180 units
    • Ending Inventory = 1,180 units × $22 = $8,360

Summary Table:

MethodCOGSEnding Inventory
FIFO$12,840$8,740
LIFO$13,660$7,600
Average Cost$13,640$8,360

Conclusions:

  • Highest Net Income: FIFO, as it gives the lowest COGS and therefore the highest gross profit.
  • Lowest Taxes: LIFO, since it results in the highest COGS and therefore the lowest taxable income.
  • Highest Ending Inventory: FIFO, because the lower-cost items are sold first, leaving higher-cost items in inventory.

Would you like further details or clarification on any part of this solution?

Related Questions:

  1. How does the perpetual inventory system differ from the periodic system in calculating COGS?
  2. How does inflation impact the choice between FIFO and LIFO?
  3. What would happen if there were returns after a sale in each costing method?
  4. How does the choice of inventory costing method affect a company's balance sheet?
  5. How does the average cost method differ in a perpetual vs periodic inventory system?

Tip: In times of rising prices, LIFO reduces taxable income but could lead to outdated inventory values.

Ask a new question for Free

By Image

Drop file here or Click Here to upload

Math Problem Analysis

Mathematical Concepts

Inventory Valuation
Cost of Goods Sold (COGS)
Perpetual Inventory System

Formulas

FIFO: First-in, first-out calculation
LIFO: Last-in, first-out calculation
Average Cost: Total cost of goods available / Total units available

Theorems

FIFO, LIFO, and Average Cost methods in inventory valuation

Suitable Grade Level

College or University Level (Accounting or Finance Course)

Related Recommendation

Calculate Ending Inventory and Cost of Goods Sold (FIFO and Weighted Average)

Calculate Cost of Goods Sold and Ending Inventory Using FIFO

FIFO Inventory Calculation: Determine COGS and Ending Inventory

Calculate Cost of Goods Sold and Ending Inventory Using FIFO Method

Calculate Ending Inventory for Logan Company using FIFO Perpetual System