Point 14 Inventory Cost (1): Specific Identification and Average Cost Inventory Quantities Inventory quantities are determined in two steps: (1) by taking a physical inventory of goods on hand (2) by determining the ownership of goods.

specific identification Inventory Cost specific identification The specific identification method tracks the actual physical flow (movement) of the goods. Each item of inventory is marked, tagged, or coded with its specific unit cost.

Assume, for example, that Fraser Valley Electronics buys three identical LCD TVs at costs of $700, $750, and $800. During the year, two are sold at a selling price of $1,200 each. At December 31, the company determines that the $750 LCD TV is still on hand. The ending inventory is $750 and the cost of goods sold is $1,500 ($700 +$800)

Average Cost The average cost flow assumption assumes that it is better to cost items using an average price.

The weighted average unit cost is then applied to the units on hand to determine the cost of the ending inventory. Illustration below shows the weighted average cost .

We can prove our calculation by multiplying the units sold by the weighted average unit cost (550 × $12 = $6,600). And, again, we can prove our calculations by ensuring that the total of the ending inventory and the cost of goods sold equals the cost of goods available for sale ($5,400 + $6,600 = $12,000).

Do It The accounting records of Cookie Cutters Company show the following data: Beginning inventory 4,000 units at $3 Purchases 6,000 units at $4 Sales8,000 units at $8 Determine the cost of goods sold and ending inventory under a periodic inventory system using average cost .

Weighted average unit cost: $36,000 ÷ 10,000 = $3.60 Average ending inventory: 2,000 × $3.60 = $7,200 Average cost of goods sold: $36,000 − $7,200 = $28,800