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Chapter 6: Problem 3

Year-End Physical Inventory The December 31 inventory for the Simpson Company included five products. The year-end physical count revealed the following quantities on hand: \begin{tabular}{cc} Product & Quantity Available \\ \(\mathrm{K}\) & 40 \\ \(\mathrm{~L}\) & 42 \\ \(\mathrm{M}\) & 60 \\ \(\mathrm{~N}\) & 52 \\ \(\mathrm{P}\) & 55 \\ \hline \end{tabular} The related unit costs were: \(\mathrm{K}, \$ 7 ; \mathrm{L}, \$ 10 ; \mathrm{M}, \$ 9 ; \mathrm{N}, \$ 5\); and \(\mathrm{P}, \$ 7\). Required Calculate the total cost of the December 31 physical inventory.

Short Answer

Expert verified
The total cost of the inventory is $1885.

Step by step solution

01

Understand the Problem

We are given a list of products, their quantities, and their respective unit costs. Our task is to calculate the total inventory cost based on these values.
02

Multiply Quantity by Unit Cost for Each Product

To find the total cost for each product, multiply the quantity of that product by its unit cost. \[ \text{Cost of K} = 40 \times 7 = 280 \] \[ \text{Cost of L} = 42 \times 10 = 420 \] \[ \text{Cost of M} = 60 \times 9 = 540 \] \[ \text{Cost of N} = 52 \times 5 = 260 \] \[ \text{Cost of P} = 55 \times 7 = 385 \]
03

Sum the Costs of All Products

Add up the total costs for all products to get the total inventory cost. \[ \text{Total Inventory Cost} = 280 + 420 + 540 + 260 + 385 = 1885 \]
04

Conclusion

The total cost of the December 31 physical inventory is $1885. This total represents the value of all products on hand at their respective unit costs.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Physical Inventory
Physical inventory refers to the count of actual products you have on hand at a specific date and time. It's essential because it helps verify the accuracy of the inventory records maintained by a company. This process ensures that the quantity of items recorded in the system matches the physical items present.

There are several reasons why conducting a physical inventory count is crucial:
  • Accuracy of Records: Regular physical counts help maintain accurate inventory records, which are vital for financial reporting and operational efficiency.
  • Identifying Discrepancies: It helps discover discrepancies, such as missing or extra items, which could indicate theft, damage, or errors in record-keeping.
  • Financial Analysis: Precise inventory counts are crucial for calculating key financial metrics, like inventory turnover and cost of goods sold.
Conducting a physical inventory can be time-consuming and may require temporary closure of sales operations. However, the benefits gained in terms of accurate inventory management typically outweigh the costs.
Unit Cost Calculation
Unit cost calculation is a fundamental concept in inventory management. It refers to determining the cost attributed to producing or purchasing one unit of a product. This is a critical step before calculating the total cost of inventory on hand.

Here's how you can calculate unit cost:
  • Direct Costs: These include all the expenses directly tied to the production of a product, such as raw materials and labor.
  • Indirect Costs: These involve costs not directly linked to production like utilities, rent, and other overheads, which are allocated to each unit.
  • Total Unit Cost: Sum the direct and indirect costs, and then divide by the number of units to find the cost per individual item.
This calculation aids businesses in pricing their products appropriately and managing expenses efficiently. In the exercise example, knowing the unit cost helped calculate the total physical inventory cost.
Inventory Costing Methods
Inventory costing methods are essential in determining how inventory costs are calculated and recorded in financial statements. They directly impact the cost of goods sold and ending inventory valuation. These methods are critical in financial reporting and taxation. Here are some of the main methods:
  • FIFO (First-In, First-Out): Assumes the first items purchased are the first to be sold. This method is beneficial in times of rising prices, as it leads to lower cost of goods sold and higher inventory values.
  • LIFO (Last-In, First-Out): Assumes the most recently purchased items are sold first. It can be advantageous during inflation as it results in lower profits and therefore less taxable income.
  • Weighted Average Cost: Calculated by dividing the total cost of goods available for sale by the total units available for sale. It smoothens out price fluctuations over the period.
Choosing the correct inventory costing method can have a significant impact on your financial health and tax obligations. It is always advisable to select a method that aligns with your operational practices and leverages financial benefits. In the provided exercise, the method wasn't specified, as each product had only one unit cost for the calculation.

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Most popular questions from this chapter

LIFO Inventory Reserve Lamar Company reports ending inventory of \(\$ 150,000\) on a LIFO basis and also reports a LIFO inventory reserve of \(\$ 32,000\). If Lamar had used FIFO rather than LIFO, ending inventory would have been: a. \(\$ 123,000\). b. \(\quad \$ 150,000\). c. \(\$ 177,000\). d. \(\$ 182,000\).

Inventory Costing Methods-Periodic Method The Luann Company uses the periodic inventory system. The following July data are for an item in Luann's inventory: July11 Beginning inventory,30 units@\$9 per unit. 10 Purchased 50 units@ \$11 per unit. 15 Sold 60 units. 26 Purchased25 units@\$13 per unit. Calculate the cost of goods sold for July and ending inventory at July 31 using (a) first-in, first-out, (b) last-in, first-out, and (c) the weighted-average cost methods. Round the cost per unit to 3 decimal places and your final answers to the nearest dollar.

Departures from Acquisition Cost Determine the proper total inventory value for each of the following items in Parker Company's ending inventory: a. Parker has 70 model \(X 3\) cameras in stock. The cameras cost \(\$ 160\) each, but their year-end net realizable value is only \(\$ 140\). b. Parker has 600 rolls of film that are past the expiration date since film is now a slow moving item. The film cost \(\$ 2.00\) each and normally sells for \(\$ 4.00\). Parker has put the expired film on clearance and is selling it for \(\$ 1.50\) per roll. There are no related selling costs. c. Parker has five computers in stock that have been used as demonstration models. These computers cost \(\$ 400\) and normally sell for \(\$ 550\). Because they are used, Parker is selling them for \(\$ 350\) each. Expected selling costs are \(\$ 10\) per computer. New models of the computer (on order \(\mathrm{Z}\) ) will cost Parker \(\$ 420\) and will be priced to sell at \(\$ 590\).

Departures from Acquisition Cost At year-end, The Kitchen Shop has a refrigerator that has been used as a demonstration model. The refrigerator cost \(\$ 375\) and sells for \(\$ 550\) when new. In its present condition, the refrigerator will be sold for \(\$ 330\). Related selling costs are an estimated \(\$ 15\). At what amount should the refrigerator be carried in inventory? a. 5350 c. \(\$ 325\) b. \(\$ 335\) d. \(\$ 315\)

ShopMart Stores uses point-of-sale equipment at its checkout counters to read universal bar codes. It also uses a quick response system. What is a quick response system?
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