Feedbag Company began operations in 2005 by selling a single product. Data on purchases and sales for the year were as follows:
|
Purchases: Date
|
Units Purchased
|
Unit Cost
|
Total Cost
|
|
April 3
|
7,750
|
$24.40
|
$ 189,100
|
|
May 15
|
8,250
|
26.00
|
214,500
|
|
June 6
|
10,000
|
26.40
|
264,000
|
|
July 10
|
10,000
|
28.00
|
280,000
|
|
August 3
|
6,800
|
28.50
|
193,800
|
|
October 5
|
3,200
|
29.00
|
92,800
|
|
November 1
|
2,000
|
29.90
|
59,800
|
|
December 10
|
2,000
|
32.00
|
64,000
|
|
50,000
|
|
$1,358,000
|
|
Sales:
|
|
|
|
|
April
|
4,000 Units
|
|
|
|
May
|
4,000
|
|
|
|
June
|
5,000
|
|
|
|
July
|
6,000
|
|
|
|
August
|
7,000
|
|
|
|
September
|
7,000
|
|
|
|
October
|
4,500
|
|
|
|
November
|
2,500
|
|
|
|
December
|
2,000
|
|
|
|
Total units
|
42,000
|
|
|
|
Total sales
|
$1,300,000
|
|
|
On January 3, 2006, the president of the company, Heather Ola, asked for your advice on costing the 8,000-unit physical inventory that was taken on December 31, 2005. Moreover, since the firm plans to expand its product line, she asked for your advice on the use of a perpetual inventory system in the future.
1. Determine the cost of the December 31, 2005, 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 2005.
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, 2005?
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?