Inventory Costing Methods Chapter 6 Inventory Costing Methods

Situation Determine the cost of goods sold Beginning Inventory 100 units $5/unit (Jan 1) Purchased 50 units at $6/unit ( March 3) Purchased 40 Units at $7/unit (June 1) Purchased 50 Units at $8/unit ( Sept 1) Purchased 30 Units at $9/unit (Nov 30) Cost of Goods Available for Sale: $1750 At the end of the year, we had 100 units left in stock Determine the cost of goods sold

Specific Identification Specific Identification – The products are unique enough or small enough in number that we know exactly which products we have sold. Eg. Car Dealership. From the previous slide – We assume that we can specifically identify which products we sold

Specific Identification We sold: 50 @ $5/units, 35 @ $6/units, 35 @ 7/ unit,50 @ $8/units. COGS = (50*5)+(35*6)+(35*7)+(50*8) =250+210+245+400= $1105 Ending Inventory = (50*5)+(15*6)+(5*7)+(30*9) =250+90+35+270 =645

Weighted Average Cost Method Items are large in number and are homogeneous (nuts and bolts). A Weighed Average Cost is determined and is used to calculate ending inventory and COGS = $6.48/ per unit

Weighted Average Cost Method COGS = # Sold x Weighted Average Cost COGS = 170 x $6.48 = 1101.60 Ending Inventory = # left over x WAC Ending Inventory = 100 x $6.48 =$648

FIFO FIFO – FIRST IN – FIRST OUT FIFO assumes the earliest goods purchased will be the first to be sold. The cost of the earlier inventory will reflect the COGS, The cost of the inventory purchased later will reflect the Ending Inventory

FIFO Remember - 170 units were sold, 100 units are left over. (RED = Sold) (Blue = In Stock)

FIFO COGS = (100)(5) + (50)(6) +(20)(7) COGS = 940 Ending Inventory = (20)(7) + (50)(8) + (30)(9) EI = 810

LIFO LIFO – LAST IN – LAST OUT LIFO assumes that the last goods to be purchased will be the first to be sold. COGS will reflect the cost of inventory purchased later. Ending Inventory will reflect the cost of inventory purchased earlier

LIFO Remember 170 units were sold, 100 units are left over. (RED = Sold) (Blue = In Stock)

LIFO COGS = (50)(6) + (40)(7) + (50)(8) + (30)(9) = 1250 Ending Inventory = (100)(5) = 500