Page "Cost of goods sold" Paragraph 28

After year end, Jane decides she can make more money by improving machines B and D. She buys and uses 10 of parts and supplies, and it takes 6 hours at 2 per hour to make the improvements to each machine.

Jane has overhead, including rent and electricity.

She calculates that the overhead adds 0. 5 per hour to her costs.

Thus, Jane has spent 20 to improve each machine ( 10 / 2 + 12 + ( 6 x 0. 5 ) ).

She sells machine D for 45.

Her cost for that machine depends on her inventory method.

If she used FIFO, the cost of machine D is 12 plus 20 she spent improving it, for a profit of 13.

Remember, she used up the two 10 cost items already under FIFO.

If she uses average cost, it is 11 plus 20, for a profit of 14.

If she used LIFO, the cost would be 10 plus 20 for a profit of 15.