A company sells 100 units in June. Calculate the cost of goods sold using first-in, first-out.
| | Units Received | Unit Cost |
|---|---|---|
| June 4 | 30 | $2.80 |
| June 11 | 80 | $2.20 |
| June 18 | 50 | $2.40 |
| June 25 | 40 | $2.60 |
$[?]$ per unit
Answer (1)
Identify the units sold from each purchase date based on the FIFO method.
Calculate the cost of goods sold from June 4: 30 × $2.80 = $84 .
Calculate the cost of goods sold from June 11: 70 × $2.20 = $154 .
Determine the total cost of goods sold: $84 + $154 = $238 .
Explanation
Understanding the Problem We are asked to calculate the cost of goods sold (COGS) for a company that sold 100 units in June, using the first-in, first-out (FIFO) method. FIFO means that the first units purchased are assumed to be the first units sold. We have a table showing the units received and their unit costs on different dates in June.
Applying the FIFO Method The company sold 100 units. According to FIFO, we first sell the units received on June 4, then June 11, and so on, until we account for all 100 units sold.
Calculating Cost for June 4 Units On June 4, the company received 30 units at $2.80 each. So, the first 30 units sold are from this batch. The cost for these 30 units is 30 × $2.80 = $84 .
Calculating Cost for June 11 Units Next, on June 11, the company received 80 units at $2.20 each. We need to sell a total of 100 units, and we've already accounted for 30 units from June 4. Therefore, we need to sell 100 − 30 = 70 units from the June 11 batch. The cost for these 70 units is 70 × $2.20 = $154 .
Calculating Total COGS The total cost of goods sold (COGS) is the sum of the costs from June 4 and June 11: $84 + $154 = $238 .
Final Answer Therefore, the cost of goods sold for the 100 units is $238 .
Examples
Understanding FIFO is crucial for businesses to accurately track inventory costs. For example, a bakery uses FIFO to ensure that the oldest ingredients are used first, minimizing waste. If they bought flour at $1.00 per bag on Monday and then at $1.20 per bag on Wednesday, FIFO assumes the flour used on Friday came from Monday's purchase. This method helps in calculating the true cost of goods sold and managing inventory effectively, which directly impacts profitability and financial reporting.
