Heinz Company began operations on January 1, 2010, and uses the FIFO method in costing its raw material inventory.Management is contemplating a change to the average cost method and is interested in determining what effect such a change will have on net income.Accordingly, the following information has been developed:

Based on the above information, a change to the average cost method in 2011 would result in net income for 2011 of

Question

Heinz Company began operations on January 1, 2010, and uses the FIFO method in costing its raw material inventory.Management is contemplating a change to the average cost method and is interested in determining what effect such a change will have on net income.Accordingly, the following information has been developed:

Based on the above information, a change to the average cost method in 2011 would result in net income for 2011 of

Quizplus · Accepted Answer

Switching to the average cost method in 2011 would result in a decrease in cost of goods sold and an increase in ending inventory. Under the average cost method, the cost of goods sold is calculated as the average cost of all units available for sale during the period, which is lower than the FIFO cost of goods sold in this case. As a result, net income would increase by the difference between the FIFO and average cost of goods sold, which is $76,000 ($1,100,000 - $1,024,000). Therefore, net income for 2011 under the average cost method would be $1,004,000 ($928,000 + $76,000).

Heinz Company Began Operations on January 1, 2010, and Uses