P8-7 Alternative Inventory Methods The Habicht Company was formed in 2006 to produce a single product. The production and sales for the next four years were as follows:
| Production Units Total Costs | Sales Units Sales Revenue |
Units in Ending Inventory | ||
2006 | 100,000 | $200,000 | 80,000 | $400,000 | 20,000 |
2007 | 120,000 | 234,000 | 110,000 | 550,000 | 30,000 |
2008 | 130,000 | 247,000 | 150,000 | 750,000 | 10,000 |
2009 | 130,000 | 240,500 | 120,000 | 600,000 | 20,000 |
Required
1. Determine the gross profit for each year under each of the following periodic inventory methods:a. FIFOb. LIFOc. Average cost (round unit costs to 3 decimal places)
2. Explain whether the company’s return on assets (net income divided by average total assets, as we discussed in Chapter 6) would be higher under FIFO or LIFO. and Inventory Pools On January 1, 2004 Grover Company changed its inventory cost flow method to the LIFO cost method from the FIFO cost method for its raw materials inventory. It made the change for both financial statement and income tax reporting purposes. Grover uses the multiple-pools approach, under which it groups substantially identical raw materials into LIFO inventory pools; it uses weighted average costs in valuing annual incre- mental layers. The composition of the December 31, 2006 inventory for the Class F inventory pool is as follows:
|
Units | Weighted Average Unit Cost |
Total Cost |
|
Base year inventory—2004 | 9,000 | $10.00 | $ 90,000 |
|
Incremental layer—2005 | 3,000 | 11.00 | 33,000 |
|
Incremental layer—2006 | 2,000 | 12.50 | 25,000 |
|
Inventory, December 31, 2006 | 14,000 |
| $148,000 |
Inventory transactions for the Class F inventory pool during 2007 were as follows:
• On March 2, 2007, 4,800 units were purchased at a unit cost of $13.50 for $64,800.
• On September 1, 2007, 7,200 units were purchased at a unit cost of $14.00 for $100,800.
• A total of 15,000 units were used for production during 2007.The following transactions for the Class F inventory pool took place during 2008:
• On January 11, 2008, 7,500 units were purchased at a unit cost of $14.50 for $108,750.
• On May 14, 2008, 5,500 units were purchased at a unit cost of $15.50 for $85,250.
• On December 29, 2008, 7,000 units were purchased at a unit cost of $16.00 for $112,000.
• A total of 16,000 units were used for production during 2008.
Required
1. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2007. Show supporting computations in good form.
2. Prepare a schedule to compute the cost of Class F raw materials used in production for the year ended December 31, 2007.
3. Prepare a schedule to compute the inventory (units and dollar amounts) of the Class F inventory pool at December 31, 2008. Show supporting computations in good form.
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