CP 7-3 Costing inventory
White Dove Company began operations in 2012 by selling a single product. Data on purchases and sales for the year were as follows:
Purchases:
Date
Units Purchased
Unit Cost
Total Cost
6-Apr
62,000
$12.20
$756,400
18-May
66,000
13
858,000
6-Jun
80,000
13.2
1,056,000
10-Jul
80,000
14
1,120,000
10-Aug
54,400
14.25
775,200
25-Oct
25,600
14.5
371,200
4-Nov
16,000
14.95
239,200
10-Dec
16,000
16
256,000
400,000
$5,432,000
Sales:
April
32,000 units
May
32,000
June
40,000
July
48,000
August
56,000
September
56,000
October
36,000
November
20,000
December
16,000
Total units
336,000
Total sales
$5,200,000
On January 4, 2013, the president of the company, Joel McLees, asked for your advice on costing the 64,000-unit physical inventory that was taken on December 31, 2012. Moreover, since the firm plans to expand its product line, he asked for your advice on the use of a perpetual inventory system in the future.
1. Determine the cost of the December 31, 2012, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) average cost method.
2. Determine the gross profit for the year under each of the three methods in (1).
3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2012.
b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2012?
c. Which inventory costing method would you choose to use for income tax purposes? Why?
d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?