# Inventory Costing Methods

Topics: Inventory, FIFO and LIFO accounting, Cost of goods sold Pages: 6 (919 words) Published: September 29, 2010
Inventory Costing Methods

Simplified Cost of Goods Sold Formula
Cost of goods sold:

Beginning inventory + Net Purchases = Cost of goods available for sale - Ending inventory = Cost of goods sold

\$ 20 100 120 (30)
\$ 90

What Value Do You Assign Inventory & COGS If You Bought Inventory at Different Prices? Beg. Inventory Purchase #1 Purchase #2 Goods Available
Cost of Goods Sold Ending Inventory

10 units 20 units 24 units 54 units
50 units 4 units

@ \$10 /unit @ \$13 /unit @ \$17 /unit

= \$100 = \$260 = \$408 \$768
= ? = ?

@ @

? /unit ? /unit

Value depends upon cost flow method!!

Cost Flow Methods Allowed per GAAP
(and Frequency of Usage)
•Specific identification •Weighted-average •First-in, first-out (FIFO) •Last-in, first-out (LIFO) Must disclose method used in notes to financial statements
*includes specific identification

Demonstration Problem
Kip’s Cap Company
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 x 20 x 22 x 24 x 28 x \$/Unit \$10 = \$13 = \$20 = \$17 = \$25 = Total \$100 \$260 \$440 \$408 \$700

Assume ending inventory includes 2 units from March 4th purchase and 2 units from the March 18th purchase.

Weighted-Average (Average Cost) Method
• • COGS & inventory values based on weighted average Smooths out the price changes

cost of goods available for sale number of units available for sale

Weighted Average
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 \$/Unit x \$10 x \$13 x \$20 x \$17 x \$25 Total = \$100 = \$260 = \$440 = \$408 = \$700

Goods Purchased Cost of Goods Sold Beg. Inventory 20 x \$13 = \$260

22 x \$12 =
24 x \$17 = \$408

\$264

18 x \$15.75 = \$283.5 Total COGS \$547.5

Inventory Balance Ave. 10 x \$10 = \$100 20 x \$13 = \$260 30 \$360 \$12.00 8 x \$12 = \$96 24 x \$17 = \$408 32 \$504 \$15.75 14 x \$15.75 = \$220.5 End. Inv. \$220.5

a

b

a) \$360 / 30 units = \$12 average cost per unit b) \$504 / 32 units = \$15.75 average cost per unit

FIFO(Typically reflects physical flow of inventory) – first units in first out Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 \$/Unit x \$10 x \$13 x \$20 x \$17 x \$25 Total = \$100 = \$260 = \$440 = \$408 = \$700

Goods Purchased Beg. Inventory 20 x \$13 = \$260

Cost of Goods Sold

Inventory Balance 10 x \$10 = \$100 20 x \$13 = \$260 30 \$360

10 x 12 x 22
24 x \$17 = \$408 8 x 10 x 18

\$10 = \$13 =

\$100 \$156 \$256

8 x \$13 = \$104 24 x \$17 = \$408 32 \$512

\$13 \$17

= \$104 = \$170 \$274 \$530

14 x \$17 = \$238 End. Inv. \$238

Total COGS

LIFO-last units in reflects performance) first out (If inventory costs rising, more accurately Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 \$/Unit x \$10 x \$13 x \$20 x \$17 x \$25 Total = \$100 = \$260 = \$440 = \$408 = \$450

Goods Purchased Beg. Inventory 20 x \$13 = \$260

Cost of Goods Sold

Inventory Balance 10 x \$10 = \$100 20 x \$13 = \$260 30 \$360

20 x 2 x 22 x

\$13 \$10

= \$260 = \$20 = \$280

24 x \$17 = \$408
18 x \$17 = \$306

8 24 32 8 6 14

x \$10 = \$80 x \$17 = \$408 \$488 X \$10 = \$80 X \$17 = \$102 \$182
\$182

Total COGS

\$586

End. Inv.

Periodic Method
• Separate purchases from sales • Calculate cost of goods available (COGA) • Calculate LIFO, FIFO, Weighted Average without regard to date of sale.

Weighted Average- Periodic
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 \$/Unit x \$10 x \$13 x \$20 x \$17 x \$25 Total = \$100 = \$260 = \$440 = \$408 = \$700

3/1 3/4 3/18

Goods Available for Sale Beg. Inventory 10 x \$10 = Purchase 20 x \$13 = Purchase 24 x \$17 = 54 Less: Sales -40 End. Inventory 14

\$100 \$260 \$408 \$768

\$768 / 54 = \$14.22

COGA Less End. Inv. Cost of Goods Sold

14 x \$14.22 =

\$768.00 - 199.08 \$568.92

First In First Out (FIFO) - Periodic
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory...