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A company just starting business made the following four inventory purchases in June: On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
-Using the FIFO cost method, the cost of the ending inventory on June 30 is
A)$645.
B)$695.
C)$1,650.
D)$1,700.

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A company just starting business made the following four inventory purchases in June:  On June 25, the company made its first sale when a local customer purchased 500 units for $3,500.The company uses a perpetual inventory system.
-Using the FIFO cost method, the cost of the ending inventory on June 30 is
A)$645. 
B)$695. 
C)$1,650. 
D)$1,700.

Quizplus · Accepted Answer

Using the FIFO method, the cost of the first 500 units sold is $1,500 (since they are the first 500 units purchased at $3 each), leaving 1,000 units in ending inventory. The remaining units are the 500 units purchased on June 20 for $4 each and the 500 units purchased on June 28 for $5 each. The cost of the ending inventory is 500 units x $4 = $2,000 + 500 units x $5 = $2,500, for a total of $4,500. Dividing by the total number of units (1,500) yields an average cost of $3, which multiplied by the 1,000 units in ending inventory, gives a cost of $3,000. However, since the company uses a perpetual inventory system, we must also include the cost of the last purchase before the sale that replenished the inventory (500 units x $5 = $2,500). Adding this to the cost of the remaining inventory gives a total ending inventory cost of $3,000 + $2,500 = $5,500, or $695 for the average cost per unit ($5,500 ÷ 1,500 units).

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