594 Chapter 15 Payroll and Inventory
According to this logic, the cost of the 475 bulbs would be(^) __1,400^475 $2,028 $688.07
Since this second calculation avoids the issue of rounding, it is more precise, and so we will use
this value. It should be noted, though, that the difference between the values is so small that it
hardly makes any difference, and in practice either method might be reasonably used.
Once we have a cost for the remaining bulbs, the total value of the light bulb inventory is the
sum of the cost of the “old” bulbs and the cost of the “new” ones.
Inventory value $688.07 $1,560 $2,248.07.
The question did not ask for this, but we could also calculate the new average cost per bulb.
There are 475 1,200 1,675 bulbs in stock, so
Average cost
$2,248.07
__1,675 $1.34 per bulb
In summary:Inventory Valuation by the Average Cost MethodThe value of the inventory of a given item is:Inventory value (^) _____Number of items as of last purchaseNumber of items left (^) (Total value as of last purchase)
FIFO
With the average cost method, when bulbs are sold there is no assumption made about
which bulbs come from which order. Whenever the merchant gets an order of light bulbs
they all go “into the same pot.”
An alternative method of valuing inventory assumes that the oldest merchandise is
always sold first. This method is known as first in, first out, better known by the acronym
FIFO.
Let’s revisit Stassler Hardware’s light bulbs, this time using FIFO to value its inventory.
Example 15.2.3 Stassler Hardware ordered 500 Kandelrite brand 14-watt compact
fl uorescent light bulbs. The total cost of this order was $750. Realizing that this order
was not large enough, the company placed an additional order for 900 more at a
cost of $1,278. The light bulbs sold well, and Stassler Hardware soon placed a new
order for another 1,200 bulbs at a cost of $1,560. When this order arrived, the store
had 475 bulbs left from the original orders. What is the value of its inventory of this
particular bulb once the new order arrives, based on the FIFO method?
To calculate inventory values with FIFO, it is convenient to have a list of the bulb orders in
table form:
Lot Number of Bulbs Value
1 500 $750
2 900 $1,278
3 1,200 $1,560
Now, the problem states that of the original orders 475 bulbs remained. Since the original
orders totaled 1,400 bulbs, this means that 1,400 475 925 bulbs had been sold. We
can adjust our table to show where these bulbs came from, and how many of the bulbs from
each lot remained.
The number sold exceeds the total of the fi rst lot of bulbs, so we assume that all 500 of
those bulbs were sold. This leaves 925 500 425 left to account for. These are assumed