Managerial Accounting and Control 1

Case Studies Analysis of Lewis Corporation

Compiled by:Abhilash Kanaparthi Roll No: 01

Executive Summary: Lewis Corporation case analysis tests our conceptual clarity of the Inventory Costing Methods of LIFO, FIFO & Average Costing. It also tests our ability to interpret and analyse when & why which method of inventory costing is beneficial. The case gives us into the insight into the pros and cons of the above mentioned Inventory Costing Methods. The case gives us the information on the Inventory transactions for Lewis Corporation during the year 2005-2007.

Problem Statement:  Finding out the Cost of goods sold (COGS) & year-end inventory for the years 2005, 2006 & 2007 using LIFO, FIFO & Average Cost Methods.  Establishing if switchover to LIFO from FIFO would reduce income tax expenses & calculating the tax savings made.  Analysing if FIFO or LIFO is beneficial during the period of recession (Year 2008) with the given sales forecast (2700 cartons) and the change in prices (Cost $24) and the ending inventory of 400 cartons to be maintained.  Finding out LIFO reserves for the year 2005 & 2006. Analysing the change in LIFO reserve number in this period and its significance.  Reason for the use of FIFO in domestic inventories in the 1980s inspite of continuing inflation in the United States. Alternatives to address the problem:  FIFO (First in First Out): FIFO method of inventory costing assumes that oldest goods are sold first & the most recently purchased are in the ending Inventory.  LIFO (Last in First Out): LIFO method of inventory costing assumes that the most recent goods purchased are sold first & the oldest goods are in the ending Inventory.  Average Cost: Average cost method establishes the average cost of goods (by weighted average) and both goods sold and inventory are costed at this average cost. Most Probable Solutions:  Solution 1: COGS Year End Inventory (Cartons) 1020 1040 1190 FIFO ($) 56930 66240 66385 Inventory FIFO ($) 21620 23130 27720 LIFO ($) 20400 20830 24205 Average Cost ($) 20865.12 22369.36 26830.93 LIFO ($) 58150 67320 67600 Average Cost ($) 57685.92 66247.72 66513.65

Year 2005 2006 2007

2005 2006 2007

 Solution 2:

From the above table we can see that Total tax Savings is $1406 applying LIFO. Hence to reduce income tax expense it is recommended to switchover from FIFO to LIFO.

 Solution 3:
Inventory at the end of 2007

Ending Inventory of 2007

FIFO No. of Cost Cartons ($) 490 23 700 23.5

COGS ($) 11270 16450

Ending Inventory of 2007

LIFO No. of Cartons 1020 20 150

Cost ($) 20 21.5 22.5

COGS ($) 20400 430 3375

Calculations by LIFO & FIFO: No. of Cost/Carton Cartons ($) 490 23 700 23.5 1510 24 2700 400 24 COGS ($) 11270 16450 36240 63960 9600 COGS ($) 45840 3375 430 12400 62045 8000

FIFO

Inventory

LIFO

No. of Cost/Carton Cartons ($) 1910 24 150 22.5 20 21.5 620 20 2700 400 20

Inventory

Analysis: FIFO 2008 Sales (2700@35.75) ($) COGS ($) Gross Margin ($) Tax Expense ($) Net Income ($) 96525 63960 32565 13026 19539 LIFO 96525 62045 34480 13792 20688

Thus as seen above LIFO will increase the Tax Expenses by $766.

 Solution 4: LIFO Inventory ($) 21620 21130 FIFO Inventory ($) 20400 20830 LIFO Reserve ($) 1220 2300

Year 2005 2006

LIFO Reserve is the difference between the inventory amounts calculated by LIFO & FIFO methods respectively. LIFO reserve number is used to convert the given LIFO

Inventory Method Costing to FIFO Inventory method of costing. This would help us to compare a company with LIFO method to that with a FIFO method using the LIFO reserve number of the first company.  Solution 5: During inflation, the cost of production rises. Thus keeping the sales price constant the gross margin in LIFO will be less than that of in FIFO as in FIFO the goods will be accounted at some older lower costs (Which would be lower than the latest inflated price). Thus in FIFO we get a higher net income to the shareholders.