T-shirt City uses a periodic inventory system. During the first year of operations, the company made four purchases of a particular product. Each purchase was for 500 units and the prices paid were $9 per unit in the first purchase, $10 per unit in the second purchase, $12 per unit in the third purchase, and $13 per unit in the fourth purchase. At the year-end, 650 of these units remained unsold. Compute the cost of goods sold under the FIFO method and LIFO method, respectively.
Answer: $13,700 (FIFO) and $16,000 (LIFO)
Explanation
Step 1: Calculate Total Cost of Purchases
- 500 units @ $9 = $4,500
- 500 units @ $10 = $5,000
- 500 units @ $12 = $6,000
- 500 units @ $13 = $6,500
- Total units purchased = 2,000 units
- Total cost of inventory = $22,000
Step 2: Identify Sold and Unsold Units
- Total purchased: 2,000 units
- Ending inventory: 650 units
- COGS = Total purchased - Ending inventory
- COGS = 2,000 - 650 = 1,350 units sold
Step 3: FIFO Method (First-In, First-Out)
FIFO means the oldest costs are used for COGS:
- 500 units @ $9 = $4,500
- 500 units @ $10 = $5,000
- 350 units @ $12 = $4,200
Total FIFO COGS = $13,700
Step 4: LIFO Method (Last-In, First-Out)
LIFO means the most recent costs are used for COGS:
- 500 units @ $13 = $6,500
- 500 units @ $12 = $6,000
- 350 units @ $10 = $3,500
Total LIFO COGS = $16,000
Final Answer:
COGS under FIFO = $13,700
COGS under LIFO = $16,000
