Under a perpetual inventory system using the FIFO method, if a company produces raincoats in three batches at costs of \$20, \$22, and \$24 respectively, what is the total cost of production associated with the 3rd raincoat sold?

• A. \$24
• B. \$22
• C. \$66
• D. \$20

Answer: (A)

Verified step by step guidance

1. Understand the FIFO (First-In, First-Out) method: Under FIFO, the oldest inventory costs are used first when calculating the cost of goods sold. This means the first items produced or purchased are the first ones sold.
2. Identify the costs of the three batches of raincoats: Batch 1 costs \$20 per raincoat, Batch 2 costs \$22 per raincoat, and Batch 3 costs \$24 per raincoat.
3. Determine the sequence of sales: Since the FIFO method is used, the first raincoat sold will come from Batch 1 (\$20), the second raincoat sold will also come from Batch 1 (\$20), and the third raincoat sold will come from Batch 2 (\$22).
4. Calculate the cost associated with the third raincoat sold: Since the third raincoat sold comes from Batch 2, its cost is \$22.
5. Verify the logic: Ensure that the FIFO method was applied correctly by checking the sequence of costs used for the sold items and confirming that the third raincoat sold corresponds to the second batch's cost.