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E9-9. Computing ending inventory and cost of sales under direct and
absorption costing (LO 12)
(AICPA adapted)
Requirement 1:
Finished goods inventory under variable (direct) costing.
Finished Goods Inventory
To begin, we know cost of goods manufactured and the beginning
balance. We need to find cost of goods sold in order to find ending
inventory. To do this, we must identify the cost to make one unit. We
can obtain this number by dividing the variable cost of goods
manufactured ($800,000) by the number of units manufactured,
Beginning inventory $0
Jacob Perez Company’s ending inventory under the variable costing method would be
$250,000.
Requirement 2:
Operating income under absorption costing is:
Absorption costing includes fixed manufacturing costs in inventory.
To find the fixed manufacturing cost portion of cost of goods sold,
we take:
Under absorption costing, operating (SG&A) expenses are treated
Requirement 3:
Finished goods inventory and cost of goods sold under absorption
costing.
Finished Goods Inventory
To begin, we know cost of goods manufactured and the beginning balance.
We need to find cost of goods sold in order to find ending inventory. To do
this, we must identify the cost to make one unit. We can obtain this number
by dividing the cost of goods manufactured ($1,152,000) by the number of
units manufactured, which is given as 80,000. From this calculation, we get
E9-10. Computing ending inventory and cost of goods sold under
absorption and variable costing (LO 12)
(AICPA adapted)
Requirement 1:
To find the cost of finished goods inventory at December 31, 2017, we first need to find cost
of goods sold for the year; then we will use a T-account analysis to obtain a figure for ending
Now that we know cost of goods sold, we can analyze the finished
goods inventory T-account.
Finished Goods Inventory
X = $7,200
Requirement 2:
Cost of goods manufactured under absorption costing is computed
as follows:
Therefore, comparative total expense would be:
Variable
Costing_
Absorption
_Costing_
Operating income under absorption costing would be $2,500 higher
E9-11. Changing to FIFO method (LO 4)
(AICPA adapted)
Use the given data (cost of goods sold, ending inventory) to derive
purchases, as indicated below:
Average Cost: 2017 2018
Cost of goods sold:
Purchases will be the same regardless of the inventory method in
use, so purchases (derived above), and the given FIFO ending inventory
FIFO: 2017 2018
Cost of goods sold:
Having determined FIFO cost of goods sold, net income for 2018 under
FIFO can be calculated:
2017 2018
Sales $1,000,00
Net income for 2018 is $5,000 higher than it would have been under
average cost. Although ending 2018 FIFO inventory is $15,000 higher,
which decreases cost of goods sold, beginning 2018 FIFO inventory is
$10,000 higher, which increases cost of goods sold. Netting the beginning
E9-12. Converting LIFO to FIFO (LO 5)
Requirement 1:
KW Steel Corp. Waretown Steel
($ in millions) 2017 2016 2017 2016
Balance sheet
(Gross margin/sales)
(COGS/average
inventory)
A comparison of the ratios suggests that KW has a lower gross
margin rate than Waretown, but a better inventory turnover.
Requirement 2:
KW Steel Corp. Waretown Steel
($ in millions) 2017 2016 2017 2016
Cost of Goods sold—LIFO 3,427.8
(COGS/average inventory)
KW’s gross profit rate, as restated, is still below Waretown’s, but the
difference is not quite as great. KW’s inventory turnover has
E9-13. Identifying effects of a LIFO liquidation (LO 6)
Requirement 1:
Requirement 2:
Requirement 3:
When prices are rising, selling more units than are purchased
results in a gross margin increase. This increase occurs when older
units, having lower costs, are presumed to be sold, thus
percentage is .50. But with the LIFO liquidation, the reported
margin percentage is .529. This mismatch can be avoided by
purchasing enough inventory in any given year to avoid liquidating
old LIFO layers.
E9-14. Eliminating FIFO holding gains (LO 1, 8)
Realized holding gain in 2017
E9-15. Correcting inventory errors (LO 14)
(CMA adapted)
The easiest way for students to visualize inventory error adjustment
is to use the cost of goods sold formula and analyze the errors one
at a time. Starting with the 2015 error and assuming beginning 2015
inventory was correctly stated:
2015 Error
Equals: Goods availableNone
Minus: Ending inventory
overstated by
$23,000
Equals: Cost of goods sold
understated by
$23,000
Since cost of goods sold is understated due to the ending inventory
Moving on to 2016, the December 31, 2015 ending inventory
becomes the beginning 2016 inventory. Therefore, two adjustments
must be made to 2016 income—one for the feed-forward effect of
the 2015 error and another for the $61,000 2016 understatement.
2015 Error 2016 Error
Beginning inventory
overstated by
$23,000
None
Plus: Purchases None None
overstated by
$23,000
Minus: Ending inventory None
understated by
$61,000
Equals: Cost of goods sold
overstated by
$23,000
overstated by
$61,000
Therefore, 2016 cost of goods sold is overstated by $84,000, and
income is understated by this amount. The corrected 2016 income
is $254,000 + $84,000 = $338,000.
The 2017 computation is:
2016 Error 2017 Error
Beginning inventory
understated by
$61,000
None
Equals: Goods available
understated by
$61,000
None
Minus: Ending inventory None
understated by
$17,000
Equals: Cost of goods sold
understated by
$61,000
overstated by
$17,000
Therefore, 2017 cost of goods sold is understated by $44,000.
E9-16. Computing inventory impairment (LO 10)
(AICPA adapted)
1. Because Moore is using FIFO, market is defined as net
realizable value (NRV) under Accounting Standards Update (ASU)
2015-11. Replacement cost is not used in LCNRV calculations.
a. NRV for product #1 is $25 ($30 selling price less $5 cost to
b. NRV for product #2 is $74 ($100 selling price less $26 cost
2. Because Moore is using LIFO, market is defined as replacement
cost, but it cannot exceed net realizable value or be below net
realizable value less normal profit margin.
a. Market for product #1 is $16 ($25 NRV less $9 profit),
b. Market for product #2 is the replacement cost of $46, which
