A company had an inventory shrinkage of 100 units discovered at the end of the year. The initial inventory was valued at $8,000, with purchases of $12,000 during the year. The comp... A company had an inventory shrinkage of 100 units discovered at the end of the year. The initial inventory was valued at $8,000, with purchases of $12,000 during the year. The company’s sales were $25,000, and it uses the Periodic System. Assuming the company uses the Weighted Average Cost method, what will be the cost per unit if the physical count shows 1,000 units remaining?
Understand the Problem
The question is asking us to calculate the cost per unit of inventory using the Weighted Average Cost method. We need to take into account the initial inventory, purchases, sales, inventory shrinkage, and the remaining units to find the cost per unit.
Answer
The cost per unit is calculated as $Cost\ per\ unit = \frac{C_{total}}{U_{remaining}}$.
Answer for screen readers
The cost per unit is given by the formula:
$$ Cost\ per\ unit = \frac{C_{total}}{U_{remaining}} $$
Steps to Solve
- Calculate Total Cost of Inventory
Add together the costs of the initial inventory and any additional purchases made.
If the initial inventory is denoted as $C_i$ and the total purchases as $C_p$, the total cost $C_{total}$ is:
$$ C_{total} = C_i + C_p $$
- Determine Total Units Available for Sale
Next, calculate the total units available for sale by adding the initial inventory units and the purchased units.
Let $U_i$ be the initial inventory units and $U_p$ be the purchased units:
$$ U_{total} = U_i + U_p $$
- Calculate Units Sold and Remaining Inventory
Subtract the units sold and any inventory shrinkage from the total available units to find the remaining inventory units.
If the units sold is $U_s$ and shrinkage is $U_sch$, then:
$$ U_{remaining} = U_{total} - U_s - U_sch $$
- Calculate Weighted Average Cost per Unit
Now, divide the total cost of inventory by the remaining units to find the cost per unit:
$$ Cost\ per\ unit = \frac{C_{total}}{U_{remaining}} $$
The cost per unit is given by the formula:
$$ Cost\ per\ unit = \frac{C_{total}}{U_{remaining}} $$
More Information
The Weighted Average Cost method averages the cost of all units available for sale during the accounting period, giving a smooth cost per unit, which can be beneficial when prices fluctuate.
Tips
- Forgetting to account for the shrinkage when calculating the remaining inventory.
- Miscalculating the total cost by ignoring some purchases or initial inventory costs.
- Using incorrect units for calculation (e.g., dollars for cost but units for quantity).
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