The Reuschel Company began 2018 with an inventory of 10,000 units at a cost of $7 per unit. During 2018, 50,000 units were purchased for $8.50 each. Sales for the year totaled 54,000 units, leaving 6,000 units on hand at the end of 2018. Reuschel uses a periodic inventory system and the LIFO inventory cost method.Required: 1. Calculate cost of goods sold for 2018. 2. Calculate the effect of the LIFO on income.
Answered on
1. Calculating Cost of Goods Sold (COGS) for 2018:
Calculate the total cost of goods available for sale:
Beginning Inventory:
10,000 units at $7 per unit = $70,000
Plus Purchases during 2018:
50,000 units at $8.50 per unit = $425,000
Total Cost of Goods Available for Sale
= $70,000 + $425,000
= $495,000
Determine the cost of goods sold:
Cost of Goods Available for Sale - Ending Inventory = COGS
COGS = $495,000 - (6,000 units * $8.50)
COGS = $495,000 - $51,000
COGS = $444,000
2. Calculating the Effect of LIFO on Income:
Under LIFO, the most recent costs (the last units purchased) are matched against revenue first, which affects the cost of goods sold. Using LIFO will reflect the newer, higher costs in COGS, resulting in a lower reported income due to the higher expenses.
The effect on income due to LIFO can be calculated by comparing the COGS using LIFO against what it would have been using FIFO (First-In-First-Out).
Using FIFO:
Cost of Goods Sold
= $495,000 - (6,000 units * $7)
= $495,000 - $42,000
= $453,000
Effect of LIFO on Income = FIFO COGS - LIFO COGS
Effect of LIFO on Income = $453,000 - $444,000 = $9,000
Therefore, the effect of using LIFO instead of FIFO on income for 2018 is a reduction of $9,000. This reduction is due to the higher cost of goods sold when using the LIFO method compared to FIFO, resulting in lower reported income.