A company sells 100 units in June. Calculate the cost of goods sold using first-in, first-out.
| | Units Received | Unit Cost |
|---|---|---|
| June 4 | 40 | $1.80 |
| June 11 | 70 | $1.50 |
| June 18 | 40 | $1.80 |
| June 25 | 50 | $1.70 |
$[?] per unit
Answer (2)
Determine the number of units sold from each purchase date using the FIFO method.
Calculate the cost of goods sold from June 4: 40 × $1.80 = $72 .
Calculate the cost of goods sold from June 11: 60 × $1.50 = $90 .
Sum the costs to find the total cost of goods sold: $72 + $90 = $162 .
Explanation
Understanding the Problem We are asked to calculate the cost of goods sold (COGS) for a company that sold 100 units in June, using the first-in, first-out (FIFO) method. The FIFO method assumes that the first units purchased are the first ones sold. We need to determine the cost of the 100 units sold based on the provided purchase dates and unit costs.
Determining Units Sold from Each Purchase Date First, we sell the 40 units received on June 4 at $1.80 per unit. Then, we sell as many as possible of the 70 units received on June 11 at $1.50 per unit. Since we sold 40 units from June 4, we need to sell 100 - 40 = 60 more units. So, we sell 60 units from the June 11 purchase.
Calculating the Cost of Goods Sold Now, we calculate the cost of goods sold. The cost of the 40 units from June 4 is 40 * $1.80 = $72. The cost of the 60 units from June 11 is 60 * $1.50 = $90.
Summing the Costs Finally, we sum the costs to find the total cost of goods sold: $72 + $90 = $162.
Examples
Understanding the FIFO method is crucial in inventory management. For instance, a bakery uses FIFO to ensure that the oldest ingredients are used first, minimizing waste. If they bought flour at $1.00 per bag on Monday and $1.20 per bag on Wednesday, using FIFO means the bread baked on Friday uses the flour bought on Monday first. This helps in accurately calculating costs and managing inventory effectively, ensuring fresher products and reducing spoilage.
Using the FIFO method for calculating COGS, the total cost for the 100 units sold in June is $162.00. This is calculated by first selling all 40 units from June 4 and then 60 units from June 11. The respective costs contribute to the final total of COGS.
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