Q29PGA_5 - Horngren'S Financial And Managerial Accounting

Question

Steel Mill began August with 50 units of iron inventory that cost \(35 each. During August, the company completed the following inventory transactions:

                                                  Units                Unit Cost               Unit Sales Price

Aug. 3            Sale                      45                                                            \) 85

8                     Purchase              90                      $ 54

21                   Sale                       85                                                               88

30                   Purchase              15                          58

 

Requirements

5. Compute gross profit for August using FIFO, LIFO, and weighted-average inventory costing methods.

Step-by-Step Solution

Answer

Gross profit under FIFO, LIFO, and average  cost is $5,235, $5,140, $5,225 respectively. 

Step-by-Step Solution Step 1: Computation of total revenue

$$\begin{gathered} \mathrm{Total} \mathrm{Revenue} = \mathrm{Sale} \mathrm{value} \mathrm{of} \mathrm{Aug} 3 + \mathrm{Sale} \mathrm{value} \mathrm{of} \mathrm{Aug} 21 \\ =\left(45\times \$85\right)+\left(85\times \$88\right) \\ =\$3,825+\$7,480 \\ =\$11,305 \end{gathered}$$

Step 2: Gross profit under FIFO

$$\begin{gathered} \mathrm{Gross} \mathrm{Profit} =\mathrm{Total} \mathrm{Revenue} -\mathrm{COGS} \mathrm{under} \mathrm{FIFO} \\ =\$11,305-\$6,070 \\ =\$5,235 \end{gathered}$$

Step 3: Gross profit under LIFO

$$\begin{gathered} \mathrm{Gross} \mathrm{Profit} = \mathrm{Total} \mathrm{Revenue} -\mathrm{COGS} \mathrm{Under} \mathrm{LIFO} \\ =\$11,305 -\$6,165 \\ =\$5,140 \end{gathered}$$

Step 4: Gross profit under the weighted average method

$$\begin{gathered} \mathrm{Gross} \mathrm{Profit} = \mathrm{Total} \mathrm{Revenue} - \mathrm{COGS} \mathrm{under} \mathrm{weighted} \mathrm{averaged} \\ =\$11,305-\$6,080 \\ =\$5,225 \end{gathered}$$