Purpose: This case addresses three inventory topics: (1) inventoriable costs, (2) the LCM rule, and (3) the retail method.
Toastie Corporation, a retailer of small kitchen appliances, purchases its inventories from various suppliers.
Instructions
(a)
1. Explain what costs will be inventoriable for Toastie.
2. Explain why Toastie's administrative costs would or would not be inventoriable.
(b)
1. Toastie uses the lower of cost or market rule for its inventory. What is the theoretical justification for this rule?
2. The original cost of the inventory is above the replacement cost which is above the net realizable value of the inventory. Explain what amount should be used to value the inventory and why.
3. Explain and illustrate the journal entry that should be made to record an excess of cost over market when the LCM method is used along with a perpetual inventory system.
(c) Toastie currently uses the average-cost method to determine the cost of its inventory. To simplify the procedures involved in counting and pricing its ending inventory, Toastie Corporation is considering the use of the conventional retail method. How should Toastie treat the beginning inventory and net markups in calculating the cost ratio to use to determine the ending inventory? Explain why.