Lower of Cost or Market Valuation
Oriental Sales Co. uses the first in, first out method in calculating cost of goods sold for three of the products that Oriental handles. Inventories and purchase information concerning these three products are given for the month of August. On August 31, Oriental’s suppliers reduced their prices from the most recent purchase prices by the following percentages: product A, 20%; product B, 10%; product C, 8%. Accordingly, Oriental decided to reduce its sales prices on all items by 10%, effective September 1. Oriental’s selling cost is 10% of sales price. Products A and B have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on product C (after selling cost) is 15% of sales price.
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|
|
Product A |
Product B |
Product C |
|
Aug. 1 |
Inventory |
5,000 units at $6.00 |
3,000 units at $10.00 |
6,500 units at $0.90 |
|
Aug. 1–15 |
Purchases |
7,000 units at $6.50 |
4,500 units at $10.50 |
3,000 units at $1.25 |
|
Aug. 16–31 |
Purchases |
3,000 units at $8.00 |
|
|
|
Aug. 1–31 |
Sales |
10,500 units |
5,000 units |
4,500 units |
|
Aug. 31 |
Sales price |
$8.00 per unit |
$11.00 per unit |
$2.00 per unit |
Instructions:
1. Calculate the value of the inventory at August 31, using the lower of cost or market method (applied to individual items).
2. Calculate the FIFO cost of goods sold for August and the amount of inventory write off due to the market decline.