302 Chapter 6 Inventories
ANSWERS TO SELF-STUDY QUESTIONS
- D The direct labor costs are introduced into production
initially as work in process. Once the units are completed,
these costs are transferred to finished goods inventory (an-
swer C). Materials inventory (answer A) includes only mate-
rial costs, not direct labor cost. Merchandise inventory (answer
B) is not used in a manufacturing setting, hence does not in-
clude direct labor cost. - A The lifo method of costing is based on the assump-
tion that costs should be charged against revenue in the re-
verse order in which costs were incurred. Thus, the oldest
costs are assigned to inventory. Thirty of the 35 units would
be assigned a unit cost of $20 (since 110 of the beginning in-
ventory units were sold on the first sale), and the remaining
5 units would be assigned a cost of $23, for a total of $715 (an-
swer A). - D The fifo method of costing is based on the assump-
tion that costs should be charged against revenue in the order
in which they were incurred (first-in, first-out). Thus, the most
recent costs are assigned to inventory. The 35 units would be
assigned a unit cost of $23 (answer D).- B When the price level is steadily rising, the earlier unit
costs are lower than recent unit costs. Under the fifo method
(answer B), these earlier costs are matched against revenue to
yield the highest possible net income. The periodic inventory
system (answer D) is a system and not a method of costing. - B The inventory turnover ratio is computed as follows:
Inventory turnover Cost of Merchandise Sold
Average InventoryInventory turnover