Your company makes dice. In order to make dice they buy blocks of wood from vari

Question

Your company makes dice. In order to make dice they buy blocks of wood from various wood companies. Each pair of dice requires 2 blocks of wood. This month the following occurred:

All prior months inventory was used.

Purchase of 200 blocks at $.25 each for a total of $50

Purchase of 150 blocks at $.30 each for a total of $45

Purchase of 175 blocks at $ .28 each for a total of $49

With these purchases you have 525 blocks at a value of $144

You sold 150 pairs of dice (meaning you used 300 blocks) for a $1.00 a pair or $150

Options for determining cost of goods sold/inventory

Option 1

Specific identification: You track the cost of every individual block purchased and when it is used you record the cost.

Pros: This is very accurate and you are matching revenue and the exact cost.

Cons: This may be very expensive to implement and track.

Option 2

First in First Out (FIFO): The blocks purchased first will be used first and the blocks purchased last will be used last. In this example you would have used all the 200 blocks purchased at $.25 and 100 of the blocks purchased at $.30 meaning the cost would be $80 (50+30)

Pros: Easy to implement and track

Cons: In a period of changing prices your inventory could be overvalued/undervalued

Option 3

Last in First Out (LIFO): The blocks purchased last will be used first and the blocks purchased first will be used last. In this example you would have used all the 175 blocks purchased at $.28 and 125 of the blocks purchased at $.30 meaning the cost would be $86.50 (49+37.5)

Pros: Easy to implement and track

Cons: In a period of lower prices your inventory could be overvalued. (For example if the market price is now $.28 are the remaining blocks purchased at $.30 still worth $7.50)

Option 4

Average costing: Use the average purchase price. In this example the average is .274 (144/525) meaning the cost would be $82.2(.274*300).

Pros: Easy to implement and track

Cons: You need to keep recalculating the average.

There can be other methods you can use. Which method do you think is best? Can you come up with another method?

Answer should be detailed and MBA level

Explanation / Answer

Statement Showing Calculation of stock using Various Methods Purchases Sale Blocks Rate Total Blocks Rate Total 200 0.25 50 300 1 300 150 0.3 45 175 0.28 49 525 144 Closing Under FIFO Closing Under LIFO Closing Under Average Cost Block rate total Block rate total Block rate total 50 0.3 15 25 0.3 7.5 225 0.274286 61.71429 175 0.28 49 200 0.25 50 64 57.5 61.71429 Cost Incurred These 3 methods FIFO 80 LIFO 86.5 AVERAGE COST 82.2 Since Cost incurred is least in case of FIFO Method and Closin Stock is more hence FIFO should be used for the Valuation.More Closing Stock means more profit hence FIFO should be followed.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.