Exam Q2 - Inventory

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Weighted Average Method is used for Periodic System

Cost of Goods Available for Sale/Number of Units Available for Sale = Per Unit Price

Cost of Goods Available for Sale = Beginning Inventory + Purchases

Number of Units Available for Sale = Beginning Units + Purchased Units

Moving Average Method is used for Perpetual System

Cost of Goods Available for Sale Currently/Total Number of Units Available for Sale Currently = Moving Average Cost

Cost of Goods Available for Sale Currently = Current Total Cost in Balance Total Cost Column

Total Number of Units Available for Sale Currently = Current Units in Balance Units Column

Why is there a difference between the gross profit figures for FIFO and Weighted Average Methods?

The difference in profit relates to timing. FIFO uses older stock first which usually has a lower cost which tends to leave a higher ending inventory figure. Weighted average spreads the cost more evenly over time.

Which method gives a higher gross profit and will this continue to be the case in subsequent periods?

FIFO gives a higher gross profit and will generally continue to do so when prices rise. Eventually when all inventory has been consumed the profits will be equal over the lifeof the business.

If a Perpetual System had been used how would the Gross Profit have differed?

For FIFO there would be no change in Gross Profit but may give greater information such as stock variances.

Weighted average will show a slightly different Gross Profit due to the different method of calculating the average.