Accounting Practices 501 Chapter 6 Inventory costing methods (WAC) Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

Weighted Average For this system of movement in inventory, we throw it all together and calculate a weighted average cost price Suitable for bulk inventory Ch6E - WAC 2 The following slides give an example of a perpetual inventory system using the WAC method

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 3 Aug 1Balance350 $2 per unit (GST excl) Aug 1 Balance 350 x $2 = $700

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 4 Aug 4Purchased150 $3 per unit (GST excl) Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Find the total number of items, then the total amount and then divide the amount by the number of items (1,150 ÷ 500)

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 5 Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Date Account Titles 4/ Accounts Payable Being entry to record credit purchase GST Paid67.50 Date Account Titles Ref noDebitCredit General Journal Inventory Stock shown at GST exclusive

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 6 Aug 12 Sold400 $6 per unit (GST excl Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x The Cost of Sales is the weighted average price Aug 12 Sale= $ x $2.30 = $920$ x

Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 7 Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale (400 x $6) = $ x $2.30 = $920$ x Date Account Titles Ref noDebitCredit 12/8Accounts Receivable (400x$6 + GST) 2,760 General Journal Sales (400x$6) 2,400 GST Collected Inventory 920 Cost of Sales

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 8 Aug 21Purchased70 $4 (GST excl) Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale= $ x $2.30 = $920$ x Find the total number of items, then the total amount and then divide the amount by the number of items ($510 ÷ 170) Aug 21 Purch= $51070 x $4 = $280$ x

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 9 Aug 29 Sold110 $6 (GST excl) Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale= $ x $2.30 = $920$ x Aug 21 Purch= $51070 x $4 = $280$ x The Cost of Sales is the weighted average price Aug 29 Sale= $ x $3.00 = $330$ x

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 10 Aug 31 Stock counts shows 59 units in stock Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale= $ x $2.30 = $920$ x Aug 21 Purch= $51070 x $4 = $280$ x Aug 29 Sale= $ x $3.00 = $330$ x Aug 31 Stock loss= $1771x $3.00 = $3.00$ x

Weighted Average Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 11 Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale= $ x $2.30 = $920$ x Aug 21 Purch= $51070 x $4 = $280$ x Aug 29 Sale= $ x $3.00 = $330$ x Aug 31 Stock loss= $1771x $3.00 = $3.00$ x Now we can find the total of the Cost of Sales and calculate Gross Profit $1,253 $177

Date/detailsIN (purchases)OUT (Cost of sales)Balance (value of inventory) Ch6E - WAC 12 Aug 1 Balance 350 x $2 = $700 Aug 4 Purch=$1, x $3 = $450$ x Aug 12 Sale= $ x $2.30 = $920$ x Aug 21 Purch= $51070 x $4 = $280$ x Aug 29 Sale= $ x $3.00 = $330$ x Aug 31 Stock loss= $1771x $3.00 = $3.00$ x $1,253 $177 Sales [( ) x $6)$3,060 Less Cost of Sales$1,253 $1,807Gross Profit And the value of our Inventory is $177

Weighted Average You could find a discrepancy in figures when using the WAC method. This would be due to rounding. We have to remember that this is a computerised system with higher accuracy than we can calculate Ch6E - WAC 13

Ch6E - WAC 14 Man, I’m so tired after all those calculations!!!