CHAPTER 11: INVENTORY COST FLOW

Cost Formula
PAS 2, paragraph 25 states that the cost of inventory should be
A. FIFO
B. Weighted Average
The standard does not permit LIFO
First in First Out
Assumes that the goods first purchase is first sold
FIFO is in accordance with the ordinary merchandising procedure that
the goods are sold in the order they are purchased
Favor: Statement of Financial Position
Objection: Improper matching of cost against revenue it makes cost of
goods sold understated.
Exception: In a period of deflation or declining prices the FIFO
method would result to the lowest net income.
Accordingly, when in inflation it will result in highest net income
when using FIFO.
FIFO (BOOK EXAMPLE)
Units Unit Cost Total Cost Sales(Unit)
Jan 1 Beginning Balance 800 200 160,000
8 Sale 500
18 Purchase 700 210 147,000
22 Sale 800
31 Purchase 500 220 110,000

TO COMPUTE FOR ENDING INVENTORY

ENDING INVENTORY = PURCHASES IN UNITS – SALES IN UNITS
PURCHASES (800+700+500)- SALES (500-800) = 700 ENDING INVENTORY
FIFO PERIODIC
Units Unit Cost Total Cost Sales(Unit)
Jan 1 Beginning Balance 800 200 160,000
8 Sale 500
18 Purchase 700 210 147,000
22 Sale 800
31 Purchase 500 220 110,000

From Jan 18 Purchases 200 x 210 = 42,000

From Jan 31 Purchases 500 x 220 = 110,000
700 152,000
Cost of goods sold
Inventory – Jan 1 160,000
Purchases (147,000+110,000) 257,000
Goods Available for sale 417,000
Inventory Jan 31 (152,000)
Cost of Goods Sold 265,000

IMPORTANT FORMULAS IN FIFO

COGS = Total goods available for sale – Ending. Inventory
Or COGS = TGAS – End.Inventory
TGAS = Beginning inventory + Net Purchases
COGS (EXPANDED) = Beg.Inv + Net Purchases = (TGAS)- End. Inventory

ENDING INVENTORY IN UNITS = PURCHASES IN UNITS – SALES IN UNITS

Weighted Average Method
The seller averages the cost of all items on hand
Units in ending inventory and COGS are costed at this average
cost method. It is fairly accurate when/if all purchases, production
runs and BEG inventory quantities are EQUAL

Ex. During Jan 1,2020 V record the following info bout the inventory.
Units Unit Cost
Bal. Jan 1,2020 1000 P 1
Purchased on Jan 12,2020 600 P 3
Sold on Jan 24,2020 900 -
Purchased on Jan 30,2020 400 P 5

1. Using WAM (Weighted Average Method), What amount should be

reported as inventory at Jan 31?
2. Using WAM, what amount should be reported as COGS at Jan 31?
HOW TO SOLVE?
FORMULA:
WEIGHTED AVERAGE COST PER UNIT
TOTAL GOODS AVAILABLE FOR SALE (COST/PESO/DOLLARS)
TOTAL GOODS AVAILABLE FOR SALE (UNITS)
Shortcut:
TGAS IN AMOUNT(PESO/DOLLAR) = WEIGHTED AVERAGE COST PER UNIT
TGAS IN UNIT
Compute the TGAS from Ex.1
UNITS X UNIT COST (TOTAL COST)
UNITS UNIT COST TOTAL COST
BAL@ JAN 1/2020 1000 P 1 1000
PURCHASES JAN 12/2020 600 P 3 1800
(No Need to consider sales to compute TGAS is BEG Inv. + TOTAL COST PURCHASES {Purchases less
returns, discounts and allowances + Freight In)
PURCHAES JAN 30/2020 400 P 5 2000

TGAS 2000 4800

TO COMPUTE FOR TGAS

TGAS IN PESO = 4800 = 2.40/Unit
TGAS IN UNITS 2000

ANSWER FOR 1.
ENDING INVENTORY= ENDING INVENTORY IN UNITS x WEIGHTED AVERAGE COST
PER UNIT
Or END (INV= END INV. IN UNITS x W.AVE COST PER UNIT)

TGAS IN UNITS
2000 (1000+600+400)
(900) UNITS SOLD

1100 ENDING INV IN UNITS

ENDING INV = ENDING INV IN UNITS x WAVE.Cost per unit

= 1100 x 2.40 per unit
ENDING INV = 2640
COGS = 900 x 2.40
COGS = 2160 ANSWER IN NO.2
MOVING AVERAGE METHOD
The average goods on hand must be recalculated any time
additional inventory is purchased at a unit cost different from
previously calculated average cost of goods on hand

EX.
During January 2019 J co. recorded the ff. information
Units Unit Cost
Bal. at Jan 1 2019 1000 PHP 1
Purchased on Jan 8 2019 600 PHP 3
Sold on Jan 20 2019 900
Purchased on Jan 25 2019 400 PHP 5

1. Under the moving average method, what amount should be reported

as inventory at Jan 31?
3225
2. Under the moving average method, what amount should be reported
as inventory at Jan 31?
TOTAL ALL THE SALE IN TRANSACTION(900x1.75) 1575
Solution
Units Unit Cost Total Cost
Bal. at Jan 1 2019 1000 PHP 1 1000
Purchased on Jan 8 2019 600 PHP 3 1800

Total Units on Hand 1600 1.75 2800

Sales Jan 20 (900) x 1.75 1575

Total 700 1225

Purchases Jan 25 400 5 2000

Total 1100 2.93 3225

Every additional inventory there should be adjustment in unit cost and in

order to get the unit cost TOTAL COST/UNITS for ex. 2800/1600 = 1.75 and
3225/1100 = 2.93