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    Chapter 11: Inventory Cost Flow Cost Formula PAS 2, Paragraph 25 States That The Cost of Inventory Should Be A. Fifo B. Weighted Average

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    Yami Heather
    This document discusses different inventory cost flow methods: 1. FIFO assumes goods are sold in the order they are purchased. It matches current costs to current revenues. 2. Weighted average method averages the cost of all inventory items to value ending inventory and cost of goods sold. 3. Moving average method recalculates the average cost whenever new inventory is purchased at a different cost than the previous average. The key formulas for each method are provided along with examples to demonstrate how to calculate ending inventory and cost of goods sold.

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    Chapter 11: Inventory Cost Flow Cost Formula PAS 2, Paragraph 25 States That The Cost of Inventory Should Be A. Fifo B. Weighted Average

    Uploaded by

    Yami Heather
    549 views7 pages
    This document discusses different inventory cost flow methods: 1. FIFO assumes goods are sold in the order they are purchased. It matches current costs to current revenues. 2. Weighted average method averages the cost of all inventory items to value ending inventory and cost of goods sold. 3. Moving average method recalculates the average cost whenever new inventory is purchased at a different cost than the previous average. The key formulas for each method are provided along with examples to demonstrate how to calculate ending inventory and cost of goods sold.

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    CHAPTER 11 INVENTORY COST FLOW

    Original Title

    INVENTORY COST FLOW

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    © © All Rights Reserved

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    This document discusses different inventory cost flow methods: 1. FIFO assumes goods are sold in the order they are purchased. It matches current costs to current revenues. 2. Weighted average method averages the cost of all inventory items to value ending inventory and cost of goods sold. 3. Moving average method recalculates the average cost whenever new inventory is purchased at a different cost than the previous average. The key formulas for each method are provided along with examples to demonstrate how to calculate ending inventory and cost of goods sold.

    Copyright:

    © All Rights Reserved
    549 views7 pages

    Chapter 11: Inventory Cost Flow Cost Formula PAS 2, Paragraph 25 States That The Cost of Inventory Should Be A. Fifo B. Weighted Average

    Uploaded by

    Yami Heather
    This document discusses different inventory cost flow methods: 1. FIFO assumes goods are sold in the order they are purchased. It matches current costs to current revenues. 2. Weighted average method averages the cost of all inventory items to value ending inventory and cost of goods sold. 3. Moving average method recalculates the average cost whenever new inventory is purchased at a different cost than the previous average. The key formulas for each method are provided along with examples to demonstrate how to calculate ending inventory and cost of goods sold.

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    © All Rights Reserved
    of 7

    CHAPTER 11: INVENTORY COST FLOW

    Cost Formula
    PAS 2, paragraph 25 states that the cost of inventory should be
    A. FIFO
    B. Weighted Average
    The standard does not permit LIFO
    First in First Out
    Assumes that the goods first purchase is first sold
    FIFO is in accordance with the ordinary merchandising procedure that
    the goods are sold in the order they are purchased
    Favor: Statement of Financial Position
    Objection: Improper matching of cost against revenue it makes cost of
    goods sold understated.
    Exception: In a period of deflation or declining prices the FIFO
    method would result to the lowest net income.
    Accordingly, when in inflation it will result in highest net income
    when using FIFO.
    FIFO (BOOK EXAMPLE)
    Units Unit Cost Total Cost Sales(Unit)
    Jan 1 Beginning Balance 800 200 160,000
    8 Sale 500
    18 Purchase 700 210 147,000
    22 Sale 800
    31 Purchase 500 220 110,000

    TO COMPUTE FOR ENDING INVENTORY


    ENDING INVENTORY = PURCHASES IN UNITS – SALES IN UNITS
    PURCHASES (800+700+500)- SALES (500-800) = 700 ENDING INVENTORY
    FIFO PERIODIC
    Units Unit Cost Total Cost Sales(Unit)
    Jan 1 Beginning Balance 800 200 160,000
    8 Sale 500
    18 Purchase 700 210 147,000
    22 Sale 800
    31 Purchase 500 220 110,000

    From Jan 18 Purchases 200 x 210 = 42,000


    From Jan 31 Purchases 500 x 220 = 110,000
    700 152,000
    Cost of goods sold
    Inventory – Jan 1 160,000
    Purchases (147,000+110,000) 257,000
    Goods Available for sale 417,000
    Inventory Jan 31 (152,000)
    Cost of Goods Sold 265,000

    IMPORTANT FORMULAS IN FIFO


    COGS = Total goods available for sale – Ending. Inventory
    Or COGS = TGAS – End.Inventory
    TGAS = Beginning inventory + Net Purchases
    COGS (EXPANDED) = Beg.Inv + Net Purchases = (TGAS)- End. Inventory

    ENDING INVENTORY IN UNITS = PURCHASES IN UNITS – SALES IN UNITS


    Weighted Average Method
    The seller averages the cost of all items on hand
    Units in ending inventory and COGS are costed at this average
    cost method. It is fairly accurate when/if all purchases, production
    runs and BEG inventory quantities are EQUAL

    Ex. During Jan 1,2020 V record the following info bout the inventory.
    Units Unit Cost
    Bal. Jan 1,2020 1000 P 1
    Purchased on Jan 12,2020 600 P 3
    Sold on Jan 24,2020 900 -
    Purchased on Jan 30,2020 400 P 5

    1. Using WAM (Weighted Average Method), What amount should be


    reported as inventory at Jan 31?
    2. Using WAM, what amount should be reported as COGS at Jan 31?
    HOW TO SOLVE?
    FORMULA:
    WEIGHTED AVERAGE COST PER UNIT
    TOTAL GOODS AVAILABLE FOR SALE (COST/PESO/DOLLARS)
    TOTAL GOODS AVAILABLE FOR SALE (UNITS)
    Shortcut:
    TGAS IN AMOUNT(PESO/DOLLAR) = WEIGHTED AVERAGE COST PER UNIT
    TGAS IN UNIT
    Compute the TGAS from Ex.1
    UNITS X UNIT COST (TOTAL COST)
    UNITS UNIT COST TOTAL COST
    BAL@ JAN 1/2020 1000 P 1 1000
    PURCHASES JAN 12/2020 600 P 3 1800
    (No Need to consider sales to compute TGAS is BEG Inv. + TOTAL COST PURCHASES {Purchases less
    returns, discounts and allowances + Freight In)
    PURCHAES JAN 30/2020 400 P 5 2000

    TGAS 2000 4800

    TO COMPUTE FOR TGAS


    TGAS IN PESO = 4800 = 2.40/Unit
    TGAS IN UNITS 2000

    ANSWER FOR 1.
    ENDING INVENTORY= ENDING INVENTORY IN UNITS x WEIGHTED AVERAGE COST
    PER UNIT
    Or END (INV= END INV. IN UNITS x W.AVE COST PER UNIT)

    TGAS IN UNITS
    2000 (1000+600+400)
    (900) UNITS SOLD

    1100 ENDING INV IN UNITS

    ENDING INV = ENDING INV IN UNITS x WAVE.Cost per unit


    = 1100 x 2.40 per unit
    ENDING INV = 2640
    COGS = 900 x 2.40
    COGS = 2160 ANSWER IN NO.2
    MOVING AVERAGE METHOD
    The average goods on hand must be recalculated any time
    additional inventory is purchased at a unit cost different from
    previously calculated average cost of goods on hand

    EX.
    During January 2019 J co. recorded the ff. information
    Units Unit Cost
    Bal. at Jan 1 2019 1000 PHP 1
    Purchased on Jan 8 2019 600 PHP 3
    Sold on Jan 20 2019 900
    Purchased on Jan 25 2019 400 PHP 5

    1. Under the moving average method, what amount should be reported


    as inventory at Jan 31?
    3225
    2. Under the moving average method, what amount should be reported
    as inventory at Jan 31?
    TOTAL ALL THE SALE IN TRANSACTION(900x1.75) 1575
    Solution
    Units Unit Cost Total Cost
    Bal. at Jan 1 2019 1000 PHP 1 1000
    Purchased on Jan 8 2019 600 PHP 3 1800

    Total Units on Hand 1600 1.75 2800


    Sales Jan 20 (900) x 1.75 1575

    Total 700 1225


    Purchases Jan 25 400 5 2000

    Total 1100 2.93 3225

    Every additional inventory there should be adjustment in unit cost and in


    order to get the unit cost TOTAL COST/UNITS for ex. 2800/1600 = 1.75 and
    3225/1100 = 2.93

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