Exercise 5-2A: Allocating product cost between cost of goods sold and ending inv
ID: 2367201 • Letter: E
Question
Exercise 5-2A: Allocating product cost between cost of goods sold and ending inventory Spice Co. started the year with no inventory. During the year, it purchased two identical inventory items. The inventory was purchased at different times. The first purchase cost $3,600 and the other, $4,200. One of the items was sold during the year. Required: Based on this information, how much product cost would be allocated to cost of goods sold and ending inventory on the year-end financial statements, assuming use of: a. FIFO? b. LIFO? c. Weighted average?Explanation / Answer
a. FIFO means first in first out. Using FIFO, the 3600 is assumed to have been sold. In this case, $3600 would be allocated to cost of goods sold and $4200 would be allocated to ending inventory. b. LIFO means last in first out. Using LIFO, the 4200 would have been assumed to have been sold. In this case, $4200 would be allocated to cost of goods sold and $3600 would be allocated to ending inventory. c. weighted average. (3600 + 42000)/2 = $3900. $3900 would be allocated to ending inventory, and $3900 would be allocated to cost of goods sold.