HEALTHCARE FINANCE CASE STUDY #2 SLO 5: Understand the methods of valuing invent
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Question
HEALTHCARE FINANCE
CASE STUDY #2
SLO 5: Understand the methods of valuing inventory
The Insertion Clinic specializes in quick orthopedic repairs of knees vis knee replacement surgery. The knee replacement inserts are very expensive, so the clinic has good inventory control and takes a physical inventory at year-end to establish the ending inventory quantity.
Inventory activity spanning fiscal year 20XX for Type 112 Knee Inserts, which are billed at $10,000 each, is depicted in the following table:
Description
Unit
Unit Cost
Total Cost
Beginning Inventory (January 1)
10
$2,000
$20,000
March 1: Purchase #1
18
$2,200
$39,600
June 15: Purchase #2
8
$2,600
$20,000
October 7: Purchase #3
12
$2,900
$34,000
Total on hand
48
--
$115,200
Inventory used (Sold)
28
--
--
Ending Inventory
20
--
--
Suzanne Summer, office manager, knows that account choices can affect net income. She knows you studied health care finance and turns to you to help her value the inventory and find the best method that produces the highest profit.
Explain to Suzanne why you would not consider using the specific identification costing method to value the inventory at the clinic.
Compute the cost of inventory used (sold) via weighted average costing
Compute the cost of inventory used (sold) via FIFO costing
Compute the cost of inventory used (sold) via LIFO costing
Which method produces the highest profit? Why? Does this method always produced the highest profit?
Explain to Suzanne that if she chooses the method above there are trade-offs. What are the trade-offs to using this method?
PLEASE PROVIDE EXCEL FORMULAS AS WORK NEEDS TO BE TRANSFERRED TO EXCEL
Description
Unit
Unit Cost
Total Cost
Beginning Inventory (January 1)
10
$2,000
$20,000
March 1: Purchase #1
18
$2,200
$39,600
June 15: Purchase #2
8
$2,600
$20,000
October 7: Purchase #3
12
$2,900
$34,000
Total on hand
48
--
$115,200
Inventory used (Sold)
28
--
--
Ending Inventory
20
--
--
Explanation / Answer
Weighted average :
This method assumes that we sell inventories simultaneously . An average cost per unit is calculated.
Cost of inventory sold is 67200
FIFO : This method assumes that the first inventories bought are the first ones to be sold, and that inventories bought later are sold later.
Cost of inventory sold is 59600
LIFO :
This method assumes that the last inventories bought are the first ones to be sold, and that inventories bought first are sold last.
Cost of goods sold is 73200.
FIFO method produces highest profit with lowest cost of goods sold and highest value of closing stock.
Weighted average :
This method assumes that we sell inventories simultaneously . An average cost per unit is calculated.
Units(B) Unit cost(A/B) Total cost(A) Beginning Inventory 10 2000 20000 Purchase 1 18 2200 39600 Purhase 2 8 2600 20800 purchase 3 12 2900 34800 Total on hand 48 2400 115200 Inventory sold 28 2400 67200(28X2400) Ending inventory 20 2400 48000Related Questions
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