# Illustration 6 8 demonstrates that companies also can

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Illustration 6-8 demonstrates that companies also can calculate cost of goods sold by pricing the 550 units sold using the prices of the last 550 units ac- quired. Note that of the 300 units purchased on August 24, only 150 units are as- sumed sold. This agrees with our calculation of the cost of ending inventory, where 150 of these units were assumed unsold and thus included in ending inventory. 258 Chapter 6 Inventories Date Units Unit Cost Total Cost Nov. 27 400 \$13 \$5,200 Aug. 24 150 12 1,800 Total 550 \$7,000 Illustration 6-8 Proof of cost of goods sold Under a periodic inventory system, which we are using here, all goods pur- chased during the period are assumed to be available for the first sale, regardless of the date of purchase . AVERAGE-COST The average-cost method allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred. The average-cost method assumes that goods are similar in nature. Illustration 6-9 presents the formula and a sample com- putation of the weighted-average unit cost. Cost of Goods Total Units Weighted Available H11548 Available H11549 Average for Sale for Sale Unit Cost \$12,000 H11004 1,000 H11005 \$12.00 Illustration 6-9 Formula for weighted average unit cost The company then applies the weighted average unit cost to the units on hand to determine the cost of the ending inventory. Illustration 6-10 shows the allocation of the cost of goods available for sale at Houston Electronics using average cost. We can verify the cost of goods sold under this method by multiplying the units sold times the weighted average unit cost (550 H11003 \$12 H11005 \$6,600). Note that this method does not use the average of the unit costs. That average is \$11.50 (\$10 H11001 \$11 H11001 \$12 H11001 \$13 H11005 \$46; \$46 H11004 4). The average cost method instead uses the average weighted by the quantities purchased at each unit cost. PDF Watermark Remover DEMO : Purchase from to remove the watermark

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Inventory Costing 259 COST OF GOODS AVAILABLE FOR SALE Date Explanation Units Unit Cost Total Cost Jan. 1 Beginning inventory 100 \$10 \$ 1,000 Apr. 15 Purchase 200 11 2,200 Aug. 24 Purchase 300 12 3,600 Nov. 27 Purchase 400 13 5,200 Total 1,000 \$12,000 STEP 1: ENDING INVENTORY STEP 2: COST OF GOODS SOLD \$12,000 H11004 1,000 H11005 \$12.00 Cost of goods available for sale \$12,000 Unit Total Less: Ending inventory 5,400 Units Cost Cost Cost of goods sold \$ 6,600 450 \$12.00 \$5,400 Cost of goods sold \$12,000 – \$5,400 = \$6,600 Warehouse 450 units × \$12 = \$5,400 Ending inventory Cost per unit \$12,000 ––––––––– 1,000 units = \$12 per unit Illustration 6-10 Allocation of costs— average-cost method DO IT! COST FLOW METHODS action plan a20 Understand the periodic inventory system. a20 Compute cost of goods available for sale. a20 Compute ending inventory. a20 Determine cost of goods sold. The accounting records of Shumway Ag Implement show the following data. Beginning inventory 4,000 units at \$ 3 Purchases 6,000 units at \$ 4 Sales 7,000 units at \$12 Determine the cost of goods sold during the period under a periodic inventory sys- tem using (a) the FIFO method, (b) the LIFO method, and (c) the average-cost method.
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