CH6 Lecture Notes Inventory Costing Methods

Inventory Cost Flow Assumptions (Inventory Costing Methods)

o Prices paid for inventory change from purchase to purchase during an accounting period.
o example: Dec. 21 $10/unit
Apr. 1 $11/unit
Aug. 2! $12/unit
"ov. 2# $1$/unit
o %ostly& prices are ''''''''''''''''''''''' (inflationary)
o *o +hich of these prices do +e associate +ith the units +e still have at period end, -hich
ones do +e associate +ith the goods +e sold,
o .nly if the units are distinguisha/le from each other can +e tell +hat price +e paid for
each0 this is called the '''''''''''''''''' ''''''''''''''''''''' method.
o *o +hen units are completely identical& +e must ma1e an '''''''''''''''''''''
a/out +hich costs go +ith the units sold and +hich costs stay +ith the units that remain.
1) ''''''''''''''' ''''''''/ ''''''''''''''' '''''''''' 2 the
'''''''''''''''' units +e purchased are the first ones +e sold
2) ''''''''''''''' ''''''''/ ''''''''''''''' '''''''''' 2 the
'''''''''''''''' units +e purchased are the first ones +e sold
$) '''''''''''''''''' '''''''''''' '''''''''''''''''' 2 an
''''''''''''''''''' of the prices paid is calculated and used to cost to /oth the
ending inventory units and the units sold
o 3oth the Perpetual and Periodic systems use ''''''''''''' ''''''''''''''
'''''''''''''''''''' to cost inventory:
4he perpetual system uses a cost flo+ assumption to determine the ''''''''''''
every time units are sold during the period.
4he periodic system uses a cost flo+ assumption to determine the cost of the units left in
ending inventory and to calculate ''''''''''''' for the entire period.
We will use the periodic system to practice the cost flo+ assumptions /ecause it
calculates ending inventory and 56* only once 2 at period end 2 instead of many times
during the period as the Perpetual system does.

e!mple" 7an. 1 8nventory /al. 100 units 9 $10/unit
Apr. 1 Purchase 200 units 9 $11/unit
Aug. 2! Purchase $00 units 9 $12/unit
"ov. 2# Purchase !00 units 9 $1$/unit
A physical inventory count ta1en at period end determines that !0 units are left on the
shelves.
:emem/er the calculation for 56* for the Periodic system:
#) '''''''''''''' ($irst in% $irst out)
; units cost ($)
3eg. 8nventory
< Purchases ''''''' '''''''
= 56A*
2 >nd. 8nventory (''''''') (''''''')
= 56* '''''''' ''''''''
&nding inventory"
C'("
)) '''''''''''''' (l!st in% $irst out)
; units cost ($)
3eg. 8nventory
< Purchases ''''''' '''''''
= 56A*
2 >nd. 8nventory (''''''') (''''''')
= 56* '''''''' ''''''''
&nding inventory"
C'("
*) ''''''''''''''''' ''''''''''''' '''''''''''''''''
; units cost ($)
3eg. 8nventory
< Purchases ''''''' '''''''
= 56A*
2 >nd. 8nventory (''''''') (''''''')
= 56* '''''''' ''''''''
&nding inventory"
C'("
Po+erpoint comparing methods
Lower o$ Cost or M!r+et rule At period end& a company must compare the
'''''''''''''''' ''''''''''''' (current replacement cost) of its units of ending
inventory +ith the ''''''''''''' of those units as calculated /y a cost flow assumption.
o 8f cost , fmv& leave the inventory /alance at '''''''''''''.
o 8f cost - fmv& ?+rite do+n@ the inventory /alance to '''''''''''''''' ''''''''''''''.