Exercise-3 (FIFO, LIFO and average cost method in periodic inventory system)

The Delta company uses a periodic inventory system. The beginning balance of inventory and purchases made by the company during the month of July, 2016 are given below:

  • July 01: Beginning inventory, 500 units @ $20 per unit.
  • July 18: Inventory purchased, 800 units @ $24 per unit.
  • July 25: Inventory purchased, 700 units @ $26 per unit.

The Delta company sold 1,400 units during the month of July.

Required: Compute inventory on July 31, 2016 and cost of goods sold for the month of July using following inventory costing methods:

  1. First in, first out (FIFO) method
  2. Last in, first out (LIFO) method
  3. Average cost method

 Solution:

Number of units in ending inventory:

Ending inventory = Beginning inventory + Purchases made during the month – Units sold during the month

= 500 units + *1,500 units – 1,400 units

= 600 units

*800 units + 700 units = 1,500

(1) First in, first out (FIFO) method:

a. Computation of inventory on July 31, 2016 ( i, e., ending inventory) under FIFO:

exercise-3-icm-img1

b. Computation of cost of goods sold (COGS) for July 31, 2016 under FIFO:

exercise-3-icm-img2

Alternatively, we can compute cost of goods sold (COGS) using earliest cost method as follows:

exercise-3-icm-img3

(2) Last in, first out (LIFO) method:

a. Computation of inventory on July 31, 2016 ( i, e., ending inventory) under LIFO:

exercise-3-icm-img4

b. Computation of cost of goods sold (COGS) for July 31, 2016 under LIFO:

Alternatively, we can compute cost of goods sold (COGS) using most recent cost method as follows:

exercise-3-icm-img6

 (3) If average cost method is used:

[(500 units × $20) + (800 units × $24) + (700 units × $26)]/500 units + 800 units + 700 units

= $47,400/2,000 units

= $23.70

a. Computation of inventory on July 31, 2016 ( i, e., ending inventory) under average cost method:

Ending inventory = 600 units × $23.70

= $14,220

b. Computation of cost of goods sold (COGS) for July 31, 2016 under average cost method:

Cost of goods sold (COGS) = 1,400 × $23.70

= $33,180

Alternatively, we can compute cost of goods sold (COGS) by deducting ending inventory from cost of goods available for sale:

Cost of goods sold (COGS) = Cost of goods available for sale – Ending inventory

Cost of goods sold (COGS) = [{(500 units × $20) + (800 units × $24) + (700 units × $26)} – $14,220*]

= $47,400 – $14,220

= $33,180

*See part a

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32 Comments on Exercise-3 (FIFO, LIFO and average cost method in periodic inventory system)

  1. Arslan Ahmad

    Which of the methods mentioned above will yield the lowest figure of the gross profit in the income statement?

    1. MAZIN

      IT DEPENDS ON THE PRICES CHANGE OF INVENTORY (GOODS PURCHASED , LABOR WAGES FRIGHT & SHIPMENTS CHARGES , COMISSIONS PAIED …ETC) DURING THE ACCOUNTING CYCLE + VOLUME OF TOTAL SALES .

  2. justine

    Thanx a lot now I have got simple way of calculating the inventory.

  3. KAJOKA

    thank you, very well because am well understand

  4. janine

    Will there be a change in the unit cost if there is purchase return or sales return?

  5. mercy

    Thank you very much for your work it has made me understand.

  6. sadan

    amazing, i really understand clearly now….

  7. wao i really understand

    I really understand thanks

  8. Temitope Jamiu

    I am very glad for this explanation thanks

  9. Dr. Adam

    Limitless thanks to you, it is a unique lesson.

  10. maiz

    how did you get ending inventory with regard to fifo..?

  11. Accounting For Management

    @maiz
    600 units × $26 = $15,600

  12. Bert

    Stay inafrmotive, San Diego, yeah boy!

  13. James

    Does the presence of a sales return or purchase return affect the results?

  14. Helliot

    This is really insightful. Please explain how you got 100 units (earliest cost) under LIFO

    1. Accounting For Management

      Units from July 18 purchases. Under LIFO, the units are assigned cost using earliest prices.
      500 units @ $20 per unit and remaining 100 @ $24 per unit.

  15. David

    This was great, however most questions I am coming across need to be answered via spreadsheet work.
    Do you have the solution on video as an excel spreadsheet solution by chance?

  16. Nomsa Masuku

    why did you multiplied the 600 units with $26……????(FIFO)

    1. Accounting For Management

      Under FIFO, we assume all units (600) in ending inventory belong to July 25 purchases.

  17. JOHANNES

    EXPAND MORE CLEARLY AND SIMPLER ON LIFO STEPS TO GET CLOSING STOCK

  18. Misbah

    Any one of u having manual of cost accounting by matz usry 9th edition plzzzzzz help me

  19. adane amere

    I am Very much interested to your illustration thankou

  20. David Otieno Onyango

    using Average cost method
    when the total cost available for sale =1990
    and total units is=600…based on this is the average cost going to be …3.30 or 3.31 or 3.32 or 3.33 which one is correct in such situation?

  21. kiran A R

    not understand the problem in LIFO and FIFO method please understand that

  22. Celina T

    Is this under perpetual or periodic

  23. Protap roy

    It’s more helpful

  24. Jazzy

    I thought the LIFO is last in first out. shouldn’t we start at the last or most recent purchase? why are we starting at the 500 units?

  25. Mau

    Because the most recent purchase means that it is the Last In, so it means that it should be out first. So the most recent purchase (Last In) is first in manually computing the Cost of Goods Sold.

  26. Bord Dochow

    which one is suitable for trader????

  27. Anna

    I thank God for this, it’s helps me so much may God bless you ❤️

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