Comparison of Inventory Costing Methods—Perpetual System (Appendix) Bitten Compa

Question

Comparison of Inventory Costing Methods—Perpetual System (Appendix)

Bitten Company's inventory records show 600 units on hand on October 1 with a unit cost of $5 each.

The following transactions occurred during the month of October:

All expenses other than cost of goods sold amount to $3,000 for the month. The company uses an estimated tax rate of 30% to accrue monthly income taxes.

Required:

1. Prepare a chart comparing cost of goods sold and ending inventory using the perpetual system and the following costing methods. In your calculations round moving average unit cost to three decimal places and round all other calculations and your final answers to the nearest dollar.

2. What does the Total column represent?

3. Prepare income statements for each of the three methods. When required, round your answers to the nearest dollar.

4. Will the company pay more or less tax if it uses FIFO rather than LIFO?

How much more or less?

Date Unit Purchases Unit Sales October 4 500 @ $10.00 8 800 @ $5.40 9 700 @ $10.00 18 700 @ $5.76 20 800 @ $11.00 29 800 @ $5.90

Explanation / Answer

Part 1)

The cost of goods sold and ending inventory under the perpetual system is calculated as below:

Moving Average:

_____

Notes:

The moving average rates are calculated as below:

Rate for 10/9 Sale = (100*5 + 800*5.40)/900 = $5.356

Rate for 10/20 Sale = (200*5.356 + 700*5.76)/900 = $5.67

Rate for 10/29 Balance Inventory = (100*5.67 + 800*5.90)/900 = $5,874

______

FIFO:

______

LIFO:

______

Tabular Representation:

______

Part 2)

The total column represents the total cost of inventory (beginning) and purchases distributed between the cost of goods sold (which is reported as an expense on the income statement) and ending inventory (which gets reported as an asset in the balance sheet). This total cost is frequently referred to as "Cost of Goods Available for Sale" in accounting.

______

Part 3)

The income statement under each method is prepared as below:

______

Part 4)

The company will pay more tax if it uses FIFO method

Extra Tax Paid under FIFO = Income Tax Expense under FIFO - Income Tax Expense under LIFO = 2,107 - 2,084 = $23

Purchases Sales Balance Date Units Unit Cost Total Cost Units Unit Cost Total Cost Units Unit Cost Total Cost 10/1 600 5.00 3,000 10/4 500 5.00 2,500 100 5.00 500 10/8 800 5.40 4,320 900 5.356 4,820 10/9 700 5.356 3,749 200 5.356 1,071 10/18 700 5.76 4,032 900 5.67 5,103 10/20 800 5.67 4,536 100 5.67 567 10/29 800 5.90 4,720 900 5.874 5,287 Cost of Goods Sold $10,785 Ending Inventory $5,287

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