Financial Accounting-II -Inventories and Cost of goods sold (COGS)
FIFO and weighted average method example
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2015 Fall Q. No. 12
The University Bookstore reported the following information for the year 2012, regarding ball caps with the logo
| Date | Units | Units cost | Total cost |
| Inventory @ January 1, 2012 | 500 | Rs. 10 | Rs. 5,000 |
Purchase
| January 23 | 800 | 11 | 8,800 |
| March 14 | 600 | 12 | 7,200 |
| July 5 | 500 | 13 | 6,500 |
| August 10 | 1,100 | 15 | 16,500 |
| December 15 | 1,200 | 17 | 20,400 |
| Total goods available for sale | 4,700 | 64,400 |
At the end of the year a physical count is taken and there are 600 ball caps left on December 31, 2012. Operating expenses Rs. 5,000 excluding depreciation of Rs. 1,000. Selling price per unit of ball is Rs. 25 and tax rate is 30%.
Required:
[10]
a) Use the periodic inventory system and determine the ending inventory and cost of goods sold using, FIFO, Weighted average
b) Prepare income statement under two approaches.
c) Which method pay low tax and by how much?
d) If price is decreasing order which method pay more tax?
Solution:
a.
Calculation of cost of goods sold and cost of ending inventory
Under the FIFO method
Calculation of cost of ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| December 15 | 600 | 17 | 10,200 |
| Total | 600 | 10,200 |
Calculation of cost of goods sold
Cost of goods sold = Cost of goods available for sale – Cost of ending inventory = Rs. 64,400 – 10,200 = Rs. 54,200
Under the weighted average costing (WAC) method
WAC per unit = Cost of goods available for sale / Units available for sale = 64,400 / 4,700 = Rs. 13.70 per unit
Now,
Cost of goods sold = WAC * Units sold = 13.70 * 4,100 = 56,170
Cost of ending inventory = Cost of goods available for sale – Cost of goods sold = Rs. 64,400 – 56,170 = Rs. 8,230
b.
University Bookstore
Comparative income statement
| Particulars | FIFO | WAC |
| Sales revenue (4,100 unit @ Rs. 25) Less: Cost of goods sold | Rs. 1,02,500 54,200 | Rs. 1,02,500 56,170 |
| Gross profit Less: Operating expenses Less: Depreciation | 48,300 5,000 1,000 | 46,330 5,000 1,000 |
| Net income after tax Less: Tax @ 30% | 42,300 12,690 | 40,330 12,099 |
| Net income | 29,610 | 28,231 |
c. The weighted average method pays low tax by the amount of Rs. 591 (12,690 – 12,099). It is because the cost of goods sold in the weighted average is higher than that of the FIFO method.
d. If price is in decreasing order the weighted average method will pay more tax.