INVENTORY CONCEPT & DEPRECIATION METHODS

WEEK 3 ASSIGNMENT

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INVENTORY CONCEPT & DEPRECIATION METHODS

INSTRUCTIONS:  You should review Chapter 9 before completing the template. Refer to the Week 3 Assignment directions within the course to understand what is expected in each row of the table below. Detail for each section is required. If you include enough detail for each section, the template document will be at least eight pages in length, which meets the paper length requirements. Include APA citations within the Response Column where appropriate. List your references in APA format on the last row of this template. All citations and references must be in APA style according to the Writing Center (the link will be provided to the assigned writer) guidelines. Once you complete the template, upload the document to the Week 3 Assignment section of the course.

PART I: INVENTORY CONCEPTS AND CALCULATIONS

Answer the following questions.

 

1. In your own words, discuss the inventory concept.

 

2. List an example of a hospital inventory item. Describe how this item moves from inventory to COGS (Cost of Goods Sold).

 

3. INVENTORY CALCULATION STORY PROBLEM:

ABC Pharmacy began the year with 300 units of Product A in inventory with a unit cost of $40. The following additional purchases of the product were made:

• April 1, 200 units @ $50 each
• July 1, 300 units @ $55 each
• Sept.15, 350 units @ $60 each
• Nov. 20, 200 units @ $65 each

At end of year, ABC Pharmacy had 400 units of its product unsold. Your task is to calculate cost of ending inventory as well as cost of goods sold by (a) FIFO, (b) LIFO, and (c) Weighted-Average.

Use the information in the table below to assist you in calculating the three different inventory methods shown under Inventory Methods.       

Month		Units	Cost per Unit	Amount
January 1	Begin Inventory	300	$40	$12,000
April 1		200	$50	$10,000
July 1		300	$55	$16,500
September 15		350	$60	$21,000
November 20		200	$65	$13,000
Totals		1350		$72,500

 

Make sure to show your work below for FIFO, LIFO, and Weighted-Average.

INVENTORY METHODS

 

Complete the FIFO calculations in the table: 400 Units in left in Inventory.

 

FIFO: 400 Units left in Inventory
Units	Cost per Unit	Amount
	$	$	COGAFS	$
	$	$	Cost of End. Inventory	$
	Cost of Ending Inventory	$	COGS using FIFO	$

 

 

Complete the LIFO calculations in the table: 400 Units in left in Inventory.

 

LIFO: 400 Units left in Inventory
Units	Cost per Unit	Amount
	$	$	COGAFS	$
	$	$	Cost of End. Inventory	$
	Cost of Ending Inventory	$	COGS using LIFO	$

 

Complete the Weighted-Average calculations in the table: 400 Units in left in Inventory.

Weighted -Average	$72,500	1350	$54	Average Cost per Unit
400 Units left in Inventory
Units	Cost per Unit	Amount	COGAFS	$
	$	$	Cost of End. Inventory	$
Cost of Ending Inventory			COGS using Weighted Average	$

 

PART 2: DEFINE THE FIVE (5) METHODS FOR COMPUTING BOOK DEPRECIATION.

As the Practice Manager, you are tasked with explaining the depreciation methods to Dr. Smith and Dr. Brown. Write an explanation of each method in your own words.  

 

1. Straight Line Depreciation: Include what is meant by salvage value.

 

2. Accelerated Book Depreciation: Sum of Years’ Digits Method.

 

3. Accelerated Book Depreciation: Double Declining Balance Method

 

4. Accelerated Book Depreciation: 150% Declining Balance Method.

 

PART 3: CALCULATING DEPRECIATION

As the manager of Dr. Smith and Dr. Brown’s practice, you need to decide whether to purchase new equipment. Use the following information for the depreciation method calculations. You must show your work in the blank cells provided.

 

 

1. Example of Straight-Line Depreciation Method

Use the following information to calculate the Straight Line

 

• Fixed asset cost: $20,000
• Useful life: five years
• Residual value: $2,000

 

Table for question 1, fill in the blanks for rows 4, 5, 6, 7, and 8.

Depreciation Method	Calculation	Cost	Residual Value	Useful Life	Depreciation Amount
Straight-Line	Cost – Residual Value/Useful Life	$20,000	$2,000	5	$3,600
End of Year	Cost of Equipment	Yearly Depreciation Expense	Accumulated Depreciation, End of Year	Book Value, End of Year (Cost Accumulation Depreciation)
1
2
3
4
5					Ending Residual Value

 

2. Example of Accelerated Book Depreciation: SYD (Sum of Years’ Digits) Method

Use the following information to calculate the SYD:

 

• Fixed asset cost: $20,000
• Useful life: five years
• Residual value: $2,000

 

 

 

 

Table for question 2. Fill in the blanks in rows 4, 5, 6, 7, and 8.

Depreciation Method	Cost	Residual Value		Useful Life
Sum of Year’s Digits	$20,000	$2,000	$18,000	5
End of Year	(Cost Minus Residual)	Fraction for Year	=	Yearly Depreciation Expenses	Accumulation Depreciation End of Year	Book Value, End of Year (Cost Accumulation Depreciation)
1
2
3
4
5							Ending Residual Value

 

3. Example of Accelerated Book Depreciation: DDB (Double Declining Balance) Method

 

• Fixed asset cost: $72,340
• Useful life: five years
• Salvage value: $10,000

 

 

 

 

 

 

 

 

 

Table with data for question 3 part 1

Depreciation Method	Calculation:	Cost to be Depreciated	Salvage Value	Useful Life	Straight-Line Factor	Double Declining Factor
DDB	Cost Residual Value/Useful Life	$72, 340	$10,000	5	0.2	0.4

 

Table for question 3 part 2. Fill in the blanks for columns 2, 4, 5 and 6.

Years of Useful Life	Initial cost and then the Carry Forward Book Value	Double-Declining Factor	Annual Depreciation Expense	Accumulated Depreciation (Reserve for Depreciation)	Net Remaining Underpreciated (Net Book Value)
1	$72,340	0.4	$	$	$
2		0.4	$	$	$
3		0.4	$	$	$
*4		0.2	$	$	$
*5		0.2	$	$	$	Salvage Value

 

*DDB is used for the first three years, then the SL method is used for the last two years. Therefore, the Double-Declining factor is shown for 3 years and the Straight-Line factor is shown for year 4 and 5.

 

PART 4: ANALYSIS OF DEPRECIATION METHODS

No matter which type of health care organization, as a manager, you need to be able to choose the best depreciation method for that type of organization based on the fixed asset being purchased. With that said, complete the following:

 

1. Choose one of the depreciation methods that you feel would be more feasible for a hospital to use. Explain your rationale.

 

2. Choose one of the depreciation methods that you feel would be more feasible for a physician practice to use. Explain your rationale.

 

3. Explain why it is important for a health care organization or a physician practice to use a depreciation method.

 

PART 5: RECOMMENDATION

 

1. What depreciation method do you recommend Dr. Smith and Dr. Brown use to purchase a fixed asset? Explain the rationale for your choice.

 

REFERENCES

List your References in APA Format as outlined in the assignment directions.