Methods of Inventory Cost Flow

- First In, First Out (FIFO)

- Weighted Average
- Last in, First Out (not recommended)

Method FIFO WA

Description - Goods first purchased are first sold WA - Periodic:

- IInventory is expressed in terms of - Unit cost = Cost of
recent or new prices Goods AFS / Total
- COGS Represents old prices Goods
- Favors SOFP
WA - Perpetual:
- New WA unit cost is
computed after every
purchase and purchase
return

Advantages Stated at current replacement cost Easy to apply

Rapid turnover allows for the
estimate of current value

Disadvantage Improper matching of cost against - There may be lag

revenue because the goods sold are between the current cost
stated at earlier prices resulting in the and inventory
understatement of COGS
- If prices are rising,
inventory < current cost

- If prices are decreasing,

inventory > current cost

Cost of Goods Sold

- Inventory, beginning + Net purchases = Cost of Goods Available for Sale
- CGAFS - inventory ending = COGS

Headings of a Stock cards

FIFO - perpetual inventory

purchases sales balance

Units Unit Total Units Unit Total Units Unit Total

cost cost cost cost cost cost

Take note:
- Under Fifo periodic and Fifo perpetual, inventory costs are the same
Weighted average - periodic
- Cost of beginning inventory + Cost of Purchases = COGAFS
- COGAFS/ Units AFS = Weighted average unit cost
- Weighted average unit cost x units in ending inventory = Cost of Ending inventory

Weighted average - Perpetual

Date Transaction Units Unit Cost Total Cost

Beg. Inv.
+ Pur.
- Pur. Ret
- Sales
+ Sales Ret. ___________
Cost of ending
inv

- A new WA unit cost is computed after every purchase and purchase return
- Total cost/units = new unit cost
- The moving average unit cost is not affected by a sale or a sale return

Specific Identification
- Specific costs are attributed to identified items of inventory
- Cost of inventory= units on hand x actual unit cost
- items bought earlier can be sold later
- Costly to implement, more reliable cost information

Standard costs
- Standard Quantity x Standard Price = Standard Cost
- Predetermined product costs base on the standard levels or supplies, labor, efficiency
and capacity utilization
- Predetermined = applied to all inventory movements (inventories, GAFS, purchases,
goods sold, materials placed in production.
- May be used for convenience
- Standard Cost - Actual Cost = Variance

Relative sales price methods:

- More applicable to real estate companies
- Cost is proportional to selling price
- When different items are purchased at a lumo sum or basket price, the single cost is
apportioned or allocated among the items based on their respective or relative sales
value (number of units x selling price for unit)
- The allocated cost is divided by the number of units to get the cost per unit.
- Cost per unit is multiplied by unsold units to get the cost of ending inventory