White Dove Company began operations in 2012 by selling a single product. Data on purchases and sales… 1 answer below »

CP 7-3 Costing inventory

White Dove Company began operations in 2012 by selling a single product. Data on purchases and sales for the year were as follows:

Purchases:

Date

Units Purchased

Unit Cost

Total Cost

6-Apr

62,000

$12.20

$756,400

18-May

66,000

13

858,000

6-Jun

80,000

13.2

1,056,000

10-Jul

80,000

14

1,120,000

10-Aug

54,400

14.25

775,200

25-Oct

25,600

14.5

371,200

4-Nov

16,000

14.95

239,200

10-Dec

16,000

16

256,000

400,000

$5,432,000

Sales:

April

32,000 units

May

32,000

June

40,000

July

48,000

August

56,000

September

56,000

October

36,000

November

20,000

December

16,000

Total units

336,000

Total sales

$5,200,000

On January 4, 2013, the president of the company, Joel McLees, asked for your advice on costing the 64,000-unit physical inventory that was taken on December 31, 2012. Moreover, since the firm plans to expand its product line, he asked for your advice on the use of a perpetual inventory system in the future.

1. Determine the cost of the December 31, 2012, inventory under the periodic system, using the (a) first-in, first-out method, (b) last-in, first-out method, and (c) average cost method.

2. Determine the gross profit for the year under each of the three methods in (1).

3. a. Explain varying viewpoints why each of the three inventory costing methods may best reflect the results of operations for 2012.

b. Which of the three inventory costing methods may best reflect the replacement cost of the inventory on the balance sheet as of December 31, 2012?

c. Which inventory costing method would you choose to use for income tax purposes? Why?

d. Discuss the advantages and disadvantages of using a perpetual inventory system. From the data presented in this case, is there any indication of the adequacy of inventory levels during the year?

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