Understanding the Impact of Inventory Costing Methods on Gross

Sales $4,661.00 (at) Cost of sales 3,495.50 (b) Gross profit (FIFO) $1,165.50 (a) (395 @ $5.90) + (395 @ $5.90) = $4,661.00 (0) (395 @ $4.40) + (200 @ $4.40 + 195 @ $4.50) = $3,495.50 In this case, unit costs are rising steadily. One should therefore expect gross profit to be lower under the weighted—average costing method compared to FIFO since more recent (higher) purchase costs are included in cost of sales under the weighted—average method, and older (lower) costs are included in cost of sales under FIFO. a) The ending FIFO inventory is currently reported at a cost of $5,377.50 (= 695 @$4.50 + 500 @ $4.50). A reduction of 100 units in inventory will cause a reduction of $450 (100 @ $4.50) in inventory cost. Hence, the cost of sales is overstated by $450. b) Current assets (inventory) would be understated by $450 (as calculated above).