Inventory Costing Methods: Perpetual Method Gleem Sales Corp
Inventory Costing Methodsperpetual Method Gleem Sales Corporation
Inventory Costing Methods—Perpetual Method Gleem Sales Corporation uses the perpetual inventory system. On January 1, 2015, Gleem had 2,600 units of product B with a unit cost of $40 per unit. A summary of purchases and sales during 2015 follows:
- January 3: Purchased 1,600 units at $44 per unit
- March 8: Sold 3,000 units
- June 13: Purchased 2,000 units at an unspecified unit cost
- September: Sale (details not specified)
- November: Sale (details not specified)
- December 28: Purchased 1,800 units at an unspecified unit cost
Required:
a. Assume that Gleem uses the first-in, first-out (FIFO) method. Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015, for product B.
b. Assume that Gleem uses the last-in, first-out (LIFO) method. Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015, for product B.
c. Assume that Gleem uses the weighted-average cost method. Compute the cost of goods sold for 2015 and the ending inventory balance at December 31, 2015, for product B.
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Paper For Above instruction
Introduction
Inventory management is a fundamental aspect of financial accounting that directly influences a company's reported gross profit and net income. Among the critical elements of inventory management are the methods used to track inventory costs—primarily, FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted-Average Cost. Gleem Sales Corporation, which employs a perpetual inventory system, provides an apt case study to analyze these methods’ impacts on cost of goods sold (COGS) and ending inventory. This paper explores the calculations and implications of each inventory costing method for Gleem's 2015 operations, considering the provided transaction data.
Understanding Inventory Costing Methods
The perpetual inventory system continuously updates inventory records with each purchase and sale, providing real-time visibility into inventory levels and costs. The choice of inventory costing method influences how costs are assigned to COGS and ending inventory, driving profitability analysis and tax considerations.
FIFO assumes that the earliest inventory purchased is sold first, so ending inventory consists of the latest purchases. LIFO assumes the most recent purchases are sold first, making ending inventory reflect older costs. The Weighted-Average method distributes costs evenly over all units, smoothing out price fluctuations.
Data Summary and Assumptions
Gleem's opening inventory was 2,600 units at $40 each. Purchases during 2015 include a purchase of 1,600 units at $44 per unit on January 3, and an additional purchase of 2,000 units on June 13, with unspecified costs for September, November, and December 28 purchases. There is an incomplete data set, including some unspecified purchase costs, which challenges precise calculations.
To proceed, reasonable assumptions are necessary: for purchases with missing costs, estimates or typical industry standards are employed, or the analysis is based on available data, recognizing inherent limitations. For simplicity, calculations will focus primarily on the specified purchase and sale data, applying each method accordingly.
FIFO Method Calculation
Under FIFO, the earliest costs are assigned to COGS. Starting with an opening inventory of 2,600 units at $40, and the January 3 purchase of 1,600 units at $44, the sale of 3,000 units on March 8 would deplete the older inventory first.
- Beginning inventory: 2,600 units at $40 = $104,000
- January purchase: 1,600 units at $44 = $70,400
- Total units available before sale: 4,200 units
Selling 3,000 units:
- 2,600 units at $40 = $104,000 (all inventory from opening stock)
- Remaining 400 units sold from January 3 purchase at $44 = $17,600
- Total COGS: $104,000 + $17,600 = $121,600
Remaining inventory after sale:
- Remaining from January 3 purchase: 1,200 units at $44 = $52,800
- June 13 purchase: 2,000 units (cost per unit assumed $44 or different figure, but for calculation purposes, assuming $44)
- Purchases after June 13 are unspecified; assuming no subsequent purchases are adequately listed, the ending inventory at December 31 includes these remaining units.
Total inventory at year-end:
- 1,200 units at $44 = $52,800
- 2,000 units at assumed $44 = $88,000
- 1,800 units at unknown costs from December 28 purchase (cost assumed or estimated)
This simplified approach indicates the process but lacks the precise figures needed due to incomplete purchase data.
LIFO Method Calculation
Using LIFO, the most recent purchases are considered sold first. After the initial inventory, the latest purchase on June 13 at an unspecified cost is added, influencing the calculation.
- The sale of 3,000 units on March 8 would draw primarily from June 13 inventory and current purchases:
Assuming June 13 purchase at $44 per unit:
- Start with June 13 purchase: 2,000 units at $44 = $88,000
- Remaining 1,000 units sold from the prior inventory (January purchase at $44 or older inventory)
Remaining inventory calculations mirror FIFO, but prices assigned differ accordingly.
Weighted-Average Cost Method
This method averages the cost of all units available for sale during the period, assigning this average to both COGS and ending inventory.
Total cost of beginning inventory and purchases was aggregated, then divided by total units available, resulting in an average cost per unit.
For example, summing:
- 2,600 units at $40 = $104,000
- 1,600 units at $44 = $70,400
Total units: 4,200 units
Total cost: $174,400
Average cost per unit: $174,400 / 4,200 ≈ $41.52
Using this average:
- COGS = 3,000 units × $41.52 ≈ $124,560
- Ending inventory = (remaining units) × $41.52
Conclusion
The choice of inventory costing method significantly influences the financial statements of Gleem Sales Corporation. FIFO tends to produce higher ending inventory values during inflationary periods, while LIFO results in lower taxable income due to higher COGS. The weighted-average method smooths out price fluctuations, offering a middle ground. Accurate calculations require detailed purchase data, which was hindered here by missing costs; nonetheless, the general principles and methodologies outlined provide a comprehensive understanding of how each method impacts financial reporting.
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