SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 11
Subject:

INTERMEDIATE ACCOUNTING 1 (AE15-IA1)

AISAT COLLEGE – DASMARIÑAS, INC.

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 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |2

INFORMATION SHEET PR-11.1.1

“INVENTORY COST FLOW”

Cost formulas

PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determined by using either:

a. First in, First out

b. Weighted average

The standard does not permit anymore the use of the last in, last out (LIFO) as an alternative formula in
measuring cost of inventories

First in, First out (FIFO)

The FIFO method assumes that “the goods first purchased are first sold” and consequently the goods
remaining in the inventory at the end of the period are those most recently purchased or produced.

In other words, the FIFO is in accordance with the ordinary merchandising procedure that the goods are
sold in the order they are purchased.

The rule is “first come, first sold”.

The inventory is thus expressed in terms of recent or new prices while the cost of goods sold is
representative of earlier or old prices.

This method favors the statement of financial position in that the inventory is stated at current
replacement cost.

The objection to the method is that there is improper matching of cost against revenue because the
goods sold are stated at earlier or older prices resulting in understatement of cost of sales.

Accordingly, in a period of inflation or rising prices, the FIFO method would result to the highest net
income.

However, in a period of deflation or declining prices, the FIFO method would result to the lowest net
income.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |3

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |4

Weighted average - Periodic

The cost of the beginning inventory plus the total cost of purchases during the period is divided by
the total units purchased plus those in the beginning inventory to get a weighted average unit cost.

Such weighted average unit cost is then multiplied by the units on hand to derive the inventory
value.

In other words, the average unit cost is computed by dividing the total cost of goods available for
sale by the total number of units available for sale.

The preceding illustrative data are used.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |5

Weighted average - Perpetual

When used in conjunction with the system, the weighted average method is popularly known
as the moving average method.

PaS 2, paragraph 27, provides that the weighted average may be calculated on a periodic basis
or as each additional shipment is received depending upon the circumstances of the entity.

Under this method, a new weighted average unit cost must be computed after every purchase
and purchase return.

Thus, the total cost of goods available after every purchase and purchase return is divided by
the total units available for sale at this time to get a new weighted average unit cost.

Such new weighted average unit cost is then multiplied by the units on hand to get the
inventory cost.

This method requires the keeping of inventory stock card in order to monitor the “moving” unit
cost after every purchase.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |6

Observe that a new weighted average unit cost is computed after every purchase.
Thus, after the January 18 purchase, the total cost of P207,000 is divided by 1,000 units to get a
weighted average unit cost of P207.
After the January 31 purchase, the total cost of P151,400 is divided by 700 units to get a new weighted
average unit cost of P216.

Last in, First out (LIFO)

The LIFO method assumes that "the goods last purchased are first sold” and consequently the ‘goods
remaining in the inventory at the end ‘of the period are those first purchased or produced.

The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold is
representative of recent or new prices.

The LIFO favors the income statement because there is matching of current cost against current
revenue, the cost of goods sold being expressed in terms of current or recent cost.

The objection of the LIFO is that the inventory is stated at earlier or older prices and therefore there
may be a significant lag between inventory valuation and current replacement cost

Moreover, the use of LIFO permits income manipulation, such as by making year-end purchases
designed ro preserve existing inventory layers. At times these may not even be in the best economic
interest of the entity.

Actually, in a period of rising prices, the LIFO method would result to the lowest net income. In a period
of declining prices, the LIFO method would result to the highest net income.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |7

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |8

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 Page |9

Specific identification

Specific identification means that specific costs are attributed to identified items of inventory.

The cost of the inventory is determined by simply multiplying the units on hand by their actual
unit cost.

This requires records which will clearly determine the actual costs of goods on hand.

PAS 2, paragraph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and inventories that are not ordinarily interchangeable.

The specific identification method may be used in either periodic or perpetual inventory
system.

The major argument for this method is that the flow of the inventory cost corresponds with the
actual physical flow of goods.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 10

With specific identification, there is an actual determination of cost of units sold and on hand.

The major argument against to implement even with high-speed computers.

Standard costs

Standard costs are predetermined product cost established on the basis of normal levels of
materials and supplies, labor, efficiency and capacity utilization.

Observe that a standard cost is predetermined and, once determined, is applied to all inventory
movements — inventories, goods available for sale, purchases and goods sold or placed in
production.

PAS 2, paragraph 21, states that the standard cost method may be used for convenience if the
results approximate cost,

However, the standards set should be realistically attainable and are reviewed and revised
regularly in the light of current conditions.

Standard costing is taken up in a higher accounting course and

is not discussed further in this book.

Relative sales price method

When different commodities are purchased at a lump sum, the single cost is apportioned
among the commodities based on their respective sales price. This is based on the philosophy
that cost is proportionate to selling price.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 11

References:

• Intermediate Accounting – 2020 Edition Volume 1

Author: Conrado T. Valix; Jose F. Peralta; Christian Aris M. Valix

SELF-CHECK QUESTIONS PR-11.11.1

Directions:

A. Answer the following questions.

1. What are the cost formulas in measuring the cost of inventory?

2. Explain FIFO, weighted average method, and moving average method.
3. Is LIFO allowed in measuring the cost of inventory?

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 12

SELF-CHECK ANSWERS PR-11.11.1

Directions:

Answer the following questions.

1. What are the cost formulas in measuring the cost of inventory?

 FIFO, weighted average, moving average, and LIFO.

2. Explain FIFO, weighted average method, and moving average method.

 The FIFO method assumes that “the goods first purchased are first sold” and
consequently the goods remaining in the inventory at the end of the period are
those most recently purchased or produced.

 The cost of the beginning inventory plus the total cost of purchases during the
period is divided by the total units purchased plus those in the beginning
inventory to get a weighted average unit cost.

 When used in conjunction with the system, the weighted average method is
popularly known as the moving average method.
Under this method, a new weighted average unit cost must be computed
after every purchase and purchase return.

 The LIFO method assumes that "the goods last purchased are first sold” and
consequently the ‘goods remaining in the inventory at the end ‘of the period are
those first purchased or produced.

3. Is LIFO allowed in measuring the cost of inventory?

 The standard does not permit anymore the use of the last in, last out (LIFO) as an
alternative formula in measuring cost of inventories

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
 Unit Intermediate Accounting 1
Module INVENTORY COST FLOW
AE15 – IA1 Intermediate Accounting 1 Units: 3 P a g e | 13

STUDENT NAME: __________________________________ SECTION: __________________

PERFORMANCE TASK PR-11.6.1

PERFORMANCE TASK TITLE: : INVENTORY COST

PERFORMANCE OBJECTIVE: After completing this performance task, you were being knowledgeable on
determination the cost of inventory using different formulas.
TOOLS AND MATERIALS: Modules

EQUIPMENT : none

ESTIMATED COST : none

PROCESS / PROCEDURE:

Required :
1. Tasks must be neat and presentable.
2. Show your computations and avoid erasures.

PRECAUTIONS : •Avoid copy and paste performance task of other

ASSESSMENT METHOD : Equivalent to 30points.

SUBJECT TEACHER: APPROVED FOR

11th IMPLEMENTATION:
MODULE
MIDTERM MS. MARY JOY F. LABAJO
11 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director