INVENTORY COSTING METHODS

Inventory costing methods are used to value inventory that was sold during an accounting period and amounts remaining on hand at the end of the period. The methods that will be covered are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. RISING PRICES
Example: During a normal accounting period costs of inventory will usually rise. As costs rise the profit provided by each sale becomes smaller. The general picture of FIFO, LIFO, and Average Costs during a period of rising costs is depicted below.

Date 1/1/2006 1/4/2006 1/10/2006 1/13/2006 1/21/2006 1/29/2006 1/31/2006 1/31/2006 beginning purchased sold purchased sold purchased sold ending

DR

Inventory CR 500 700 900 1000 600 300 700 300

Cost/unit Tot Cost $ 8.00 $ $ 10.00 $ $ $ 13.00 18.00 $ $ $ $

4,000.00 7,000.00 13,000.00 5,400.00 29,400.00 29,400.00 2500

Cost of Goods Available for Sale Total Units Available for Sale FIFO - First in, First Out Total Units Sold 2200 From Units 1/1/2006 500 1/4/2006 700 1/13/2006 1000

Cost Of Goods Sold Ending Inventory 1/29/2006

Cost/Unit Total Cost $ 8.00 $ 4,000.00 $ 10.00 $ 7,000.00 $ 13.00 $ 13,000.00 $ 24,000.00 18.00 $ 5,400.00

300 $

* In this situation, the first inventory item that was purchased is the first inventory item that is sold. After the oldest inventory items are sold, the next oldest items are sold. This information can be tracked by following the dates in the inventory account.
LIFO - Last in, First out Total Units Sold 2200 From Units Cost/Unit Total Cost 1/29/2006 300 $ 18.00 $ 5,400.00 1/13/2006 1000 $ 13.00 $ 13,000.00 1/4/2006 700 $ 10.00 $ 7,000.00 1/1/2006 200 $ 8.00 $ 1,600.00 $ 27,000.00 1/29/2006 300 $ 8.00 $ 2,400.00

Cost Of Goods Sold Ending Inventory

* In this situation, the last inventory item that was purchased is the first inventory item that is sold. After the newest inventory items are sold, the next most recently purchased items are sold. This information can be tracked by following the dates in the inventory account.

Average Cost Cost Of Goods Sold Ending Inventory Avg Cost/Unit 2200 $ 11.76 300 $ 11.76 $ $ 25,872.00 3,528.00

* In this situation the dates of when inventory was purchased or sold do not matter. At the end of the accounting period, the total number of items available for sale is divided by the total cost of those items and an average cost per item is calculated.

** FOR ALL SCENARIOS ABOVE **

The total for Cost Of Goods Sold and Ending Inventory should add up to the total for Goods Available For Sale.

FALLING PRICES
Example: As costs fall the profit provided by each sale becomes larger. The general picture of FIFO, LIFO, and Average Costs during a period of falling costs is depicted below.

Date 1/1/2006 1/4/2006 1/10/2006 1/13/2006 1/21/2006 1/29/2006 1/31/2006 1/31/2006 beginning purchased sold purchased sold purchased sold ending

DR

Inventory CR 500 700 900 1000 600 300 700 300

Cost/unit Tot Cost $ 8.00 $ $ 10.00 $ $ $ 8.00 6.00 $ $ $ $

4,000.00 7,000.00 8,000.00 1,800.00 20,800.00 20,800.00 2500

Cost of Goods Available for Sale Total Units Available for Sale FIFO - First in, First Out Total Units Sold 2200 From Units 1/1/2006 500 1/4/2006 700 1/13/2006 1000

Cost Of Goods Sold Ending Inventory LIFO - Last in, First out Total Units Sold 2200 1/29/2006

Cost/Unit Total Cost $ 8.00 $ 4,000.00 $ 10.00 $ 7,000.00 $ 8.00 $ 8,000.00 $ 19,000.00 6.00 $ 1,800.00

300 $

Cost Of Goods Sold Ending Inventory

From Units Cost/Unit Total Cost 1/29/2006 300 $ 6.00 $ 1,800.00 1/13/2006 1000 $ 8.00 $ 8,000.00 1/4/2006 700 $ 10.00 $ 7,000.00 1/1/2006 200 $ 8.00 $ 1,600.00 $ 18,400.00 1/29/2006 300 $ 8.00 $ 2,400.00

Average Cost Cost of Goods Sold Ending Inventory Avg Cost/Unit 2200 $ 8.32 $ 300 $ 8.32 $ 18,304.00 2,496.00

Created by: Jon Clinton Spring 2006 STUDENT LEARNING ASSISTANCE CENTER (SLAC) Texas State University-San Marcos