Using the LIFO method and the information in this image, what is the Cost of Goods Sold in December?
A. $95,000
B. $165,000
C. $222,000
D. $38,000
Answer (2)
Using the LIFO method, the Cost of Goods Sold in December is calculated to be $95,000. This is determined by taking the cost of the most recent purchases first and summing the applicable costs. Thus, the answer is A. $95,000.
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Identify that LIFO method assumes the most recently purchased units are sold first.
Calculate the cost of goods sold from November purchase: 150 × $500 = $75 , 000 .
Calculate the cost of goods sold from October purchase: 50 × $400 = $20 , 000 .
Determine the total Cost of Goods Sold: $75 , 000 + $20 , 000 = $95 , 000 .
Explanation
Understanding the Problem We are given a table of inventory purchases and need to calculate the Cost of Goods Sold (COGS) for December using the Last-In, First-Out (LIFO) method. LIFO assumes that the most recently purchased units are sold first.
Identifying the Relevant Purchases The company sold 200 units in December. According to LIFO, we first consider the most recent purchase, which was in November.
Calculating Cost from November Purchase In November, 150 units were purchased at $500 each. Since we sold 200 units, we assume that all 150 units from November were sold. The cost for these units is: 150 × $500 = $75 , 000
Determining Remaining Units We still need to account for the remaining units sold. We sold 200 units in total, and 150 came from the November purchase, so we need to account for 200 - 150 = 50 units.
Calculating Cost from October Purchase The next most recent purchase was in October, where 300 units were purchased at $400 each. We take 50 units from this purchase. The cost for these units is: 50 × $400 = $20 , 000
Calculating Total COGS The total Cost of Goods Sold (COGS) is the sum of the costs from the November and October purchases: $75 , 000 + $20 , 000 = $95 , 000
Final Answer Therefore, the Cost of Goods Sold in December using the LIFO method is $95,000.
Examples
Understanding inventory valuation methods like LIFO is crucial for businesses. For example, a retail store selling electronics can use LIFO to determine the cost of goods sold. If the store sells 200 smartphones in December, LIFO helps calculate the cost by assuming the newest smartphones purchased were sold first. This method impacts the company's financial statements and tax liabilities, providing a clear view of profitability during fluctuating costs.
