Change in Accounting for Inventory – The Kraft Manufacturing Company manufactures two products: Mult and Tran. At December 31, 2007 Kraft used the FIFO inventory method. Effective January 1, 2008, Kraft changed to the LIFO inventory method. The cumulative effect of this change is not determinable and, as a result, the ending inventory of 2007, for which the FIFO method was used, is also the beginning inventory for 2008 for the LIFO method. Any layers added during 2008 should be costed by reference to the first acquisitions of 2008, and any layers liquidated during 2008 should be considered a permanent liquidation.
The following information was available from Kraft’s inventory records for the two most recent years:
|
Mult |
Tran |
|||
|
Units |
Unit Cost |
Units |
Unit Cost |
|
|
2007 purchases: |
||||
|
7-Jan |
5,000 |
$4.00 |
22,000 |
$2.00 |
|
17-Apr |
12,000 |
4.5 |
||
|
9-Nov |
17,000 |
5 |
18,500 |
2.5 |
|
14-Dec |
10,000 |
6 |
||
|
2008 purchases: |
||||
|
12-Feb |
3,000 |
7 |
23,000 |
3 |
|
21-May |
8,000 |
7.5 |
||
|
15-Oct |
20,000 |
8 |
||
|
24-Dec |
15,500 |
3.5 |
||
|
Units on hand: |
||||
|
31-Dec-07 |
15,000 |
14,500 |
||
|
31-Dec-08 |
16,000 |
13,000 |
Required
Compute the effect on income before income taxes for the year ended December 31, 2008, resulting from the change from the FIFO to the LIFO inventory method.
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