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Inventories are assets which are held for sale in In period of inflation, FIFO method would result
the ordinary course of business, in the process of to the highest net income. However, in period of
production for such a sale or in the form of deflation, FIFO method would result to the
materials or supplies to be consumed in the lowest net income.
production process or in the rendering of The objection in this method is that there is
services improper matching of cost against revenue
because the goods sold are stated at earlier or
Cost of inventories: older prices resulting in the understatement of
a) cost of purchase cost of goods sold.
b) cost of conversion
c) other cost in bring the inventories to Sample problem:
their present location and condition. Purchases of Product A during the month of
January were:
Cost of purchase includes purchase price, import Units Unit Cost
duties, irrecoverable taxes, freight, handling and January 10 200,000 22
other costs directly attributable to the January 18 250,000 23
acquisition of finished goods, materials and January 28 100,000 24
services.
Trade discounts, rebates and other similar items A physical count on January 31 shows 250,000
are deducted in determining the cost of units of product A on hand.
purchase
What is the cost of the inventory on January 31
Cost of conversion of inventories includes direct under the FIFO method?
labor and fixed and variable production
overheads. Solution:
Units Unit Cost Total
Other cost in bring the inventories to their January 18 150,000 23 3,450,000
present location and condition. January 28 250,000 24 2,400,000
However, the following costs are excluded from Total FIFO Cost 250,000 5,850,000
the cost of inventories;
● Storage costs on goods in process are 2. Weighted Average
capitalized but storage costs on finished The cost of the beginning inventory plus the total
goods are expensed. cost of purchases during the period is divided by
● Abnormal amounts are expensed. the total units purchased plus the beginning
inventory to get a weighted average unit cost.
Cost of inventories of a service provider consists
primarily of the labor and other costs of The argument for the weighted average method
personnel directly engaged in providing the is that it is relatively, easy to apply especially with
service, including supervisory personnel and computer. The argument against it is that there
attributable overhead may be a considerable lag between the current
cost and inventory valuation since the average
Cost Methods unit cost involves early purchases.
1. First In, First Out (FIFO)
Sample problem:
X Company provided the following inventory
card during February:
Purchase Units Balance
Used Units
Price
Units
Solution:
Units Unit Cost Total Cost
50,000 5,300,000