- Determine the total cost of available goods: \(\$1,475\).
- Apply LIFO to find the cost of 61 ending inventory units: \((40 \times \$4) + (21 \times \$7) = \$307\).
- Subtract ending inventory cost from total available cost to find COGS: \(\$1,475 - \$307 = \$1,168\).
- The ending inventory cost is \(\boxed{\$307}\) and the COGS is \(\boxed{\$1,168}\).
Explanation
- Analysis of Available Goods
To calculate the ending inventory and the cost of goods sold (COGS) using the Last-In, First-Out (LIFO) method, we must first define the pool of goods available for sale. Based on the provided data, we have:
- Jan 1 inventory: 40 units at \(\$4\) = \(\$160\)
- Apr 1 purchase: 60 units at \(\$7\) = \(\$420\)
- Jun 1 purchase: 50 units at \(\$8\) = \(\$400\)
- Nov 1 purchase: 55 units at \(\$9\) = \(\$495\)
The total number of units available for sale is \(40 + 60 + 50 + 55 = 205\) units, and the total cost of these goods is \(\$160 + \$420 + \$400 + \$495 = \$1,475\).
- Calculating Ending Inventory using LIFO
The LIFO method assumes that the most recently purchased goods are the first ones sold. Consequently, the ending inventory consists of the earliest units purchased. We are given that the ending inventory consists of \(61\) units. We allocate these 61 units from the earliest inventory dates as follows:
- We take all \(40\) units from the Jan 1 purchase at \(\$4\) per unit: \(40 \times \$4 = \$160\).
- The remaining \(61 - 40 = 21\) units are taken from the next oldest purchase, which is the Apr 1 purchase at \(\$7\) per unit: \(21 \times \$7 = \$147\).
The total cost of the ending inventory is \(\$160 + \$147 = \$307\).
- Calculating Cost of Goods Sold (COGS)
The Cost of Goods Sold (COGS) is the difference between the total cost of goods available for sale and the cost of the ending inventory.
Given:
- Total Cost of Goods Available: \(\$1,475\)
- Cost of Ending Inventory: \(\$307\)
Therefore, the cost of goods sold is:
\[\text{COGS} = \$1,475 - \$307 = \$1,168.\]
Examples
The LIFO inventory method is often used by companies to manage taxable income during inflationary periods. For example, if a store sells winter jackets, and the cost to purchase those jackets from suppliers increases over time (inflation), selling the most recently purchased (and more expensive) jackets first results in a higher cost of goods sold. This leads to lower reported profit, which in turn reduces the immediate tax burden on the company. Mastering this concept is crucial for anyone working in accounting, finance, or retail management to understand the financial performance and tax strategy of a business.