Chapter 4:

Controlling and Costing Materials Inventory

Objectives:
The learner should be able to understand and know:
• How to calculate the cost of materials issued.
• How physical inventories of materials are taken
• The different inventory costing methods and inventory valuation

Start of Discussion

 INVENTORY COSTING METHODS

 Specific Identification
- Means that specific costs are attributed to identified items of inventory.
- This method is appropriate for inventories that are segregated for a specific project and
inventories that are not ordinarily interchangeable.

Three Methods to Determine Cost of Ending Inventory

 First In, First Out (FIFO)
- The goods first purchased are first sold and consequently the goods remaining in the
inventory at the end of the period are those most recently purchased or produced.
- The objection to this method is that there is improper matching of cost against
revenue.

Illustration – FIFO
The following data pertain to an inventory item:

Unit Requisition
Units Total Cost
cost in units
Jan.1 Beginning
800 200 P160,000
Balance
8 Requisition 500
18 Purchase 700 210 147,000
22 Requisition 800
31 Purchase 500 220 110,000

The ending inventory is 700 units.

FIFO- Periodic
Units Unit cost Total Cost
From Jan.18 Purchase 200 P210 P 42,000
From Jan.31 Purchase 500 220 110,000
700 P152,000

Cost of Goods Sold

Inventory – January 1 P160,000
Purchases (147,000 + 110,000) 257,000
Goods Available for Requisition P417,000
Inventory – January 31 (152,000)
Cost of Materials used P265,000

FIFO – Perpetual
This requires the preparation of stock card.

Purchases Requisition Balance

Date Units Cost Unit Total cost Units Unit cost Total cost Units Cost Unit Total Cost

Jan.1 800 200 160,000

8 500 200 100,000 300 200 60,000
18 700 210 147,000 300 200 60,000
700 210 147,000
22 300 200 60,000
500 210 105,000 200 210 42,000
200 210 42,000
31 500 220 110,000 500 220 110,000

 Weighted or Moving Average Method

- All the costs are commingled and an average cost is computed with each new purchase
and assigned to materials issued and on hand.
 Weighted Average – Periodic
- Average cost is computed by dividing the total cost of goods available for requisition
by the total number of units available for requisition.

The preceding illustrative data are used.

Units Unit cost Total cost

Jan. 1 Beginning Balance 800 200 160,000
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000

Weighted Average unit cost (417,000/2,000) P208.50

 Inventory cost (700 x P208.50) 145,950

Cost of Goods Sold

Inventory – January 1 P160,000
Purchases 257,000
Goods Available for Requisition P417,000
Inventory – January 31 (145,950)
Cost of Materials used P271,050

 Weighted Average – Perpetual

- When used in conjunction with the perpetual system, the weighted average method is
popularly known as the moving average.
- A new weighted average cost per unit must be computed after every purchase and
purchase return.
- The total cost of goods available for requisition after every purchase and purchase
return is divided by the total units available for requisition to get a new weighted
average unit cost.
Units Unit cost Total cost
Jan 1 Balance 800 200 160,000
8 Requisition (500) 200 (100,000)
Balance 200 60,000
18 Purchase 700 210 147,000
Total 1,000 207 207,000
22 Requisition (800) 207 (165,600)
Balance 207 41,400
31 Purchase 220 110,000
Total 216 151,400

Cost of Materials used from the stock card

January 8 Requisition 100,000
22 Requisition 165,600
265,600

 Last in, First out (LIFO)

- The last materials purchased are the first materials to be used. Then the materials on
hand are assumed to be the first one purchased.