Neighborly Industries has the following inventory information. Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
A) $10,992
B) $11,022
C) $23,088
D) $23,118

Question

Neighborly Industries has the following inventory information.  Assuming that a periodic inventory system is used, what is the amount allocated to ending inventory on a FIFO basis?
A) $10,992 
B) $11,022 
C) $23,088 
D) $23,118

Quizplus · Accepted Answer

To allocate ending inventory on a FIFO (first-in, first-out) basis, we assume that the first items purchased are the first items sold, and the last items purchased are the items left in inventory. Using this method, we calculate the cost of ending inventory based on the cost of the most recent purchases.

In this case, the inventory is made up of the following: 
- 100 units purchased at $100 per unit on 1/1 
- 150 units purchased at $110 per unit on 2/1 
- 250 units purchased at $120 per unit on 3/1 
- 200 units purchased at $130 per unit on 4/1

The cost of the most recent purchases (the 200 units purchased on 4/1) is $130 per unit. To calculate the cost of ending inventory, we multiply the number of units in ending inventory by the cost per unit, using the cost of the most recent purchases.

According to the question, the number of units in ending inventory is not given. However, we know that a total of 700 units were purchased, and 500 units were sold, so the remaining 200 units must be in ending inventory.

Therefore, the cost of ending inventory using FIFO is: 
200 units x $130 per unit = $26,000

However, we need to allocate the total cost of all inventory (beginning inventory plus purchases) to both cost of goods sold and ending inventory. To do this, we can use the weighted average cost method or LIFO (last-in, first-out) method.

Using the weighted average cost method, the cost per unit of inventory is calculated as follows: 
- Beginning inventory: 100 units x $100 per unit = $10,000 
- Purchases: (150 units x $110 per unit) + (250 units x $120 per unit) + (200 units x $130 per unit) = $102,000 
- Total cost of all inventory: $10,000 + $102,000 = $112,000 
- Cost per unit: $112,000 / 700 units = $160 per unit

Using this cost per unit, we can allocate the cost of goods sold and ending inventory as follows: 
- Cost of goods sold: 500 units sold x $160 per unit = $80,000 
- Ending inventory: 200 units x $160 per unit = $32,000

Therefore, only choice B is the correct answer.

Neighborly Industries Has the Following Inventory Information