ACCT2511

Financial Accounting
Fundamentals

Topic 2
Inventory

Nicole Ang
UNSW Business School
School of Accounting, Auditing & Taxation
Learning Objectives (abbreviated)
At the end of this topic you should be able to:
1. Understand types of inventory & cost flows for retailers & manufacturers
2. Explain the difference between perpetual and periodic inventory systems
3. Write journal entries for transactions under both periodic & perpetual
methods
4. Calculate the cost of inventory in accordance with accounting standards
5. Discuss different cost flow assumptions (FIFO, LIFO & weight. Avg.)
6. Calculate the impact of different cost flow assumptions on profit
determination and inventory valuation
7. Analyse the effect of inventory transactions on the financial statements
8. Apply lower of cost and net realisable value rule to inventory
measurement
9. Interpret the inventory disclosure policies of Australian & USA companies
10. Know the difference between job costing and process costing systems
used by manufacturers to assign costs to cost objects.
Today we’ll be discussing everything “inventory”

• What it is & what costs apply

• Differences between manufacturing vs retail organisations
• Choices about how frequently to update inventory records,
& relevant journal entries (perpetual vs periodic system)
• Choices in assumptions about the flow of inventory in/out
• Choices specific to manufacturing organisations: assigning
costs to inventory produced (process vs job order costing)
What part of a Company Annual Report are we looking at today?

•
•
 LO 1
Background - Defining Inventory

• Inventories are assets

(a) Held for sale in the ordinary course of business
(b) In the process of production for such sale; or
(c) In the form of materials or supplies to be consumed in the
production process or in producing the rendering of
services.
• Inventory types
• Raw Materials
• Work in Progress
• Finished Goods Inventory
• Merchandise Inventory

• Inventory is considered a current asset

5
Background - Cost of Inventory

“The cost of inventories shall comprise all costs of

purchase, costs of conversion, and other costs incurred
in bringing the inventories to their present location and
condition”.

What is cost?
• Value sacrificed for goods and services that are
expected to bring a current or future benefit to the
organisation (i.e, it could be an expense or an asset)

6
Financial Statement Presentation
• Retail/Merchandising business:
• All inventory is in a saleable condition (eg. supermarket).
• Therefore one balance sheet item called “inventory” is
sufficient.

• Manufacturing Business:
• Not all inventory is in a saleable condition
• There may be a selection of raw materials, work in
progress and finished goods inventory
• An inventory classification for each item is needed
7
Financial Statement Presentation LO 1

• Retail/Merchandising business:
• All inventory is in a saleable condition (eg. supermarket)
• One balance sheet item called “inventory” is sufficient
• Inventory cost flow for a retailer:
Merchandise inventory!
Inventory COGS

OB $Y $X $X
Dr COGS X
Cr Inventory X

8
 LO 1
Financial Statement Presentation
• Manufacturing Business:
• Not all inventory is in a saleable condition
• There may be a selection of raw materials, work in
progress and finished goods inventory
• An inventory classification for each item is needed

9
Example: Origami business

Raw materials Work in process Finished goods

Dr WIP $A Dr Finished Goods $B

Cr Raw mat. $A Cr WIP $B
 Example: Origami business (continued)
Raw materials do not transform all by themselves into WIP!

Work in process
1. Raw materials 3. Manufacturing
(direct materials) Overhead*

Dr WIP $A
Cr Raw mat. $A 2. Direct Labour

Dr WIP $C
Dr WIP $B Cr Manuf. Overhead $C
Cr Wages Payable $B

* Allocation of Overhead can be very complex – we will look at a simple eg later

 LO 1

Manufacturing costs!
Raw materials Work-in-process Finished goods
inventory inventory inventory

OB OB+ OB+ COGS

$... $$$ $$$

Wages Pay.

More on this later

Manuf. Overhead

12
Where are we now?
• Today we’ll be discussing

• What it is & what costs apply

• Differences between manufacturing vs retail
organisations
• Choices about how frequently to update inventory
records, & relevant journal entries (perpetual vs
periodic system)
• Choices in assumptions about the flow of inventory
in/out
• Choices specific to manufacturing organisations:
assigning costs to inventory produced (process vs job
order costing)
 LO 2
Perpetual and Periodic Method

• Two accounting methods of maintaining inventory records:

• Perpetual: Continuous records of all inventory

transactions (sales & purchases) to calculate closing
balance of inventory and COGS
• Periodic: Uses inventory opening balance, purchases,
and an end-of-period count to deduce COGS
• Sales are accounted for in the same manner, regardless
of method used

14
Which one to use? LO 2

• Record-keeping choice, not a reporting choice

• Cost-benefit analysis
• Consider nature of inventory, unit values, volumes
• Relative cost of maintaining respective systems
• E.g., Technology such as optical scanners
• Perpetual Method:
• Provides better internal control
• Can more easily determing stock losses/shortages
(physical count vs inventory account)
• But it is more costly, time consuming, and not suitable
for all types of goods (e.g., coal)
Perpetual Method Recording LO 3

• All purchases recorded in the Inventory account

Dr Inventory Cost Price
Cr Cash / AP Cost Price

• All sales of inventory require two entries:

1. Dr Cash / AR Selling Price
Cr Sales Selling Price
2. Dr Cost of Goods Sold Cost Price
Cr Inventory Cost Price

• An ongoing record of the expense (COGS) is maintained.

We have been using this method in classes so far!

16
Perpetual Method – closing accounts
• The accounts that typically relate to inventory include

Inventory COGS Cash

A B C

AR AP Sales
D E F

• Which ones would be closed at the end of the period?

Closing Entries at the end of the financial year –
Perpetual Method
• The following journal entries would be prepared:

Dr Sales F
Cr P&L Summary F

Dr P&L Summary B
Cr Cost of Goods Sold B

Sales COGS
OB 0 OB 0
F F B B
CB 0 CB 0
18
 LO 3
Perpetual Method – journal entry example
On June 1, company X purchased inventory for $100 cash.
On June 20, it sold it for $300 cash. Write the journal entries.

1/6 Dr Inventory 100

Cr Cash 100

20/6 Dr Cash 300

Cr Sales Revenue 300

Dr COGS expense 100

Cr Inventory 100
 LO 3
Perpetual Method – example continued
• At the end of the financial year (June 30), some of
Company X accounts had balances as follows:
• Sales $150,000 Inventory
• COGS $50,000 30 000 3 000
• Inventory $30,000
27 000

• BUT a physical stock count revealed that only $27,000 of

inventory was on hand!
• Correcting journal entry on 30/6:
Dr Inventory shortage expense 3000
Cr Inventory 3000
Perpetual Method – example continued LO 3

• Updated balances:
• Sales $150,000
• COGS $50,000
• Inventory $27,000
• Inventory shortage expense $3,000

• Closing entries on June 30?

30/6 Dr Profit and Loss summary 53 000
Cr Inventory shortage expense 3 000
Cr COGS 50 000
Dr Sales 150 000
Cr Profit and Loss summary 150 000
Periodic Method Recording LO 3

• Use a Purchases account to record all inventory purchases:

Dr Purchases (expense) Cost Price
Cr Cash / AP Cost Price

• No changes made to the inventory account until end of year.

• All inventory sales require one entry only:

Dr Cash / AR Selling Price
Cr Sales revenue Selling Price

22
Periodic Method Recording
COGS is not recorded during the year under this system.
So at the end of the year, it needs to be calculated.

Calculation of Cost of Goods Sold

Opening Inventory 30 000
(records, last yr’s stocktake)

Plus: Purchases (records) 50 000

Less: Ending Inventory (stocktake) 27 000

Cost of Goods Sold (deduced) 53 000

23
Closing Entries – Periodic Method
Under the periodic method, closing entries not only close
the temporary accounts of ‘Sales’ and ‘Purchases’, they
also adjust the Balance Sheet account of ‘Inventory’.

Opening Inventory 30,000

Plus: Purchases 50,000
Less: Ending Inventory 27,000
Cost of Goods Sold 53,000

I.e., by closing these accounts to P&L Summary, you

essentially put a COGS amount in that account, and you
input the correct ending balance in your inventory account
24
Closing Entries – Periodic Method
Opening Inventory 30,000 a
Plus: Purchases 50,000 b
Less: Ending Inventory 27,000 c
Cost of Goods Sold 53,000
Inventory Purchases P&L summary
30 000 a 30 000 OB 0 a 30 000 c 27 000
c 27 000 50 000 b 50 000 b 50 000
27 000 CB 0 53 000

Overall effect on P&L summary is 53 000 Dr

25
 LO 3
Recap – Period Method Closing Entries
• As part of the closing process, the following journal
entries would be prepared:

Dr Sales xxx
Cr P&L Summary xxx

Dr P&L Summary xxx

Cr Purchases xxx

Dr P&L Summary xxx

Cr Inventory (OB Inventory) xxx

Dr Inventory (CB Inventory) xxx

Cr P&L Summary xxx
26
Where are we now?
• Today we’ll be discussing

• What it is & what costs apply

• Differences between manufacturing vs retail
organisations
• Choices about how frequently to update inventory
records, & relevant journal entries (perpetual vs
periodic system)
• Choices in assumptions about the flow of inventory
in/out
• Choices specific to manufacturing organisations:
assigning costs to inventory produced (process vs job
order costing)
 LO 5
Cost Flow Assumptions

• Price of inventory purchased throughout the year may vary

• When inventory is stored for later use/sale, items with
different costs are mixed together.
• This creates complications in accounting for the closing
inventory balance and COGS
• Refer to following illustration

Which of these
did we sell?

28
 Cost Flow Assumptions example
OB 1/1/22 Bought 4 more pencils (in Stocktake at the end of yr
2 pencils @ $1 each order shown below L-R), but -> 3 pencils left.
prices changed during the yr.
What is COGS?
What is inventory CB?

We don’t know!

cost $1 $1 $2 $3 $4 $4
Total value available to sell: $2 + $13 = $15
 LO 4
Cost Flow Assumptions

• How can we overcome this problem?

• Track each individual item through the inventory flow
(specific identification)?
• Accurate approach based on physical flow of goods
• Traditionally has been time consuming and expensive.
• Technology making specific identification easier (eg. bar
code technology).
• In cases where the costs of this approach outweigh the
benefits, cost flow assumptions are a useful alternative.

30
 LO 5 & 7
Cost Flow Assumptions

• Some possibilities include:

• First-in First-out method (FIFO)
• Last-in First-out method (LIFO)
• Weighted Average method (or moving average)

• If prices are changing (e.g., with inflation) each method will

provide different ending inventory and COGS amounts.
• REMEMBER: These are assumptions about inventory flow
within an organisation. The actual physical flow of
inventory may be different.

31
 LO 5 & 7
First-in First-out (FIFO)
• Method assumes that the first units purchased are the
first units sold.
• Ending inventory is assumed to consist of the most
recently acquired units.
• Points to note:
• Results in a higher profit level in times of rising prices
(relative to LIFO and weighted average).
• Suitable assumption for perishable items or those
subject to obsolescence.
• Closing inventory balance is closer to current cost
(relative to LIFO and weighted average).

32
 Cost Flow Assumptions example - FIFO
Stocktake shows 3 pencils in inventory => sold 3 pencils
What is the value of my ending inventory?
What is my COGS?
Sold! Still on hand! Inventory OB +
purchases =
Inventory CB + COGS

$15 =
Inventory CB + COGS
(3 pencils) (3 pencils)

= $11 + $4

cost $1 $1 $2 $3 $4 $4
Total value available to sell: $2 + $13 = $15
 LO 5 & 7
Last-in First-out (LIFO)
• This method assumes that the last units purchased (i.e. the
most recent purchases) are the first units sold.
• Ending inventory is assumed to consist of the earliest
acquired units.
• Points to note:
• Results in a higher reported COGS and lower inventory
balance than other methods in times of rising prices
(beneficial for tax purposes in some countries).
• Does not usually match the physical flow.
• Results in an outdated inventory balance (inventory
recoded at old prices).
• Not permitted under Australian accounting standards (but
is allowed in the US).
34
 Cost Flow Assumptions example - LIFO
Stocktake shows 3 pencils in inventory => sold 3 pencils
What is the value of my ending inventory?
What is my COGS?
Still on hand! Sold! Inventory OB +
purchases =
Inventory CB + COGS

$15 =
Inventory CB + COGS
(3 pencils) (3 pencils)

= $4 + $11

cost $1 $1 $2 $3 $4 $4
Total value available to sell: $2 + $13 = $15
 LO 5 & 7
Weighted Average

• Using this method, a weighted average cost is calculated

and then applied to the number of units sold and the
number of units in ending inventory.

• When using a perpetual inventory control system, it is

referred to as the moving average method.

• Points to note:
• Simple to apply and less subject to profit manipulation.
• Appropriate for products that are homogeneous (i.e.,
the same) and tend to be mixed together.

36
 LO 5 & 7
Weighted average
• Periodic: Weighted average =
Total cost of goods available for sale for a period
Total number units available for sale for a period

• Perpetual: Moving weighted average

– recalculate the average price after every purchase
Periodic weighted avg = $15/6 = $2.5
COGS = $2.5 x 3 = $7.50
End Inv = $2.5 x 3 = $7.50

$1 $1 Avg.$2$2.50
Weight. $3 each
$4 $4 To calculate Perpetual moving avg
you’d need more info regarding dates

37
 LO 5 & 7
FIFO vs. LIFO vs. Weighted Average

• When prices are changing, each method will provide a

different ending inventory and COGS value
• But note that the sum of these two items will always be the
same, no matter what the method!
• Beg. Inventory + Purchase = COGS + End. Inventory
Total cost = Expense + Asset

A cost can either be an asset or an expense

38
 LO 5
In summary
•Three major types of cost flow assumptions

•First In, First Out method (FIFO)

•Last In, First Out method (LIFO)
•Weighted Average method (or moving average)

•So in combination:
Cost Flow Periodic control Perpetual control
Assumption
FIFO FIFO FIFO
LIFO Periodic LIFO Perpetual LIFO
Average Weighted average Moving average
Comprehensive Illustration

• Each method will be illustrated using the periodic and

perpetual inventory systems.

• The calculations are the same irrespective of whether

a periodic or perpetual system is employed, except
that under the perpetual system the calculation must
be performed each time a transaction occurs.

40
Illustration - ABC Ltd
ABC Ltd bought and sold inventory during January.
Over the following slides you will be asked to calculate:

Using the periodic system method:

A. COGS and ending inventory under:
1. FIFO, 2. LIFO, 3.Weighted Average, 4. Specific ID
B. Show Closing entries for FIFO

Using the perpetual system method:

A. COGS and ending inventory under:
1. FIFO, 2. LIFO, 3. Moving Average
B. Show Closing entries for FIFO
41
 Lecture Example

• Stocktake at the end of Jan revealed that 350 units were still on hand.

Details Date Units Unit cost Total cost Units sold

Opening stock 1/1/22 200 $2 $400
Purchased 15/1/22 300 $3 $900
Sold 17/1/22 250
Purchased 28/1/22 500 $4 $2 000
Sold 30/1/22 400
Total 1 000 $3 300 650

42
 LO 6
Compare the Results

Periodic Perpetual
FIFO LIFO Weight FIFO LIFO Moving
Avg Avg
COGS 1,900 2, 450 2,145 1,900 2,350 2,063

Ending 1,400 850 1,155 1,400 950 1,238

Inv
Total 3,300 3,300 3,300 3,300 3,300 3,300

43
Lecture Example- Periodic System

• ABC made several inventory purchases during January

• January stocktake revealed that 350 units were on hand
Details Date Units Unit Cost Total Cost
Opening stock 1/1/22 200 $2 $400
Purchased 15/1/22 300 $3 $900
Purchased 28/1/22 500 $4 $2,000
Total 1,000 $3,300

Required:
A. Calculate ABC ending inventory & COGS at 31/1/22 under the
periodic inventory system using:
1. FIFO 2. LIFO 3. Weighted Average 4. Specific Identification
B. Prepare closing entries relating to inventory for FIFO

44
Lecture Example – Periodic System

• How many units were sold during the month?

Units

Beginning Inventory 200

+ Purchases 800
– Ending Inventory 350
= Inventory Sold 650

45
 Units Unit Units
cost Ending inventory 350
o/b 200 $2
COGS 650
300 $3
Total units 1000
500 $4
Total units & value: 1000 $3300

A. Value of Ending Inventory and COGS under PERIODIC:

1. FIFO 2. LIFO 3. Weighted Avg
Sold 650 units Sold 650 units Total Cost = $3,300
200 @ $2 = 400 500@ $4 = 2 000 Total Units = 1,000
300 @ $3 = 900 150 @ $3 = 450 W.Avg cost/unit = $3.30
150 @ $4 = 600 COGS $2 450
COGS $1 900 COGS $2,145 (650 x $3.30)
End. Inv $1 400 End. Inv. $850 End. Inv $1,155 (350 x $3.30)
(350@$4) (150@$3 + 200@$2)

46
 A4. Lecture Example – Specific Identification
Assume the 350 units in ending inventory can be
separately identified as 100 from opening stock & 250 from
28th Jan purchase:
Units Unit cost
o/b 200 $2
• Ending Inventory 350 units = $1200: 300 $3
- 100 @ $2 (100 from o/b) 500 $4
- 250 @ $4 (250 from 28th Jan)

• Sold 650 units => COGS = $2 100

– 100 @ $2 = 200
– 300 @ $3 = 900
– 250 @ $4 = 1 000

47
Compare the Results

Periodic System
FIFO LIFO Wght Avg Specific ID

COGS 1,900 2, 450 2,145 2,100

Ending Inv 1,400 850 1,155 1,200

Total Value 3,300 3,300 3,300 3,300

48
B. Closing Entries (for FIFO only)
Units Unit cost Value
OB: 200 units $2 $400
Purchase: 300 units $3 $900
Purchase: 500 units $4 $2 000

• Part of the closing process (illustration relates to FIFO).

Dr P&L Summary 2,900
Cr Purchases 2,900

Dr P&L Summary 400

Cr Inventory 400

Dr Inventory 1,400
Cr P&L Summary 1,400
49
 Lecture Example- Perpetual System
• ABC made several inventory purchases and sales during January.
• January stocktake revealed that 350 units were still on hand.

Details Date Units Unit cost Total cost Units sold

Opening stock 1/1/22 200 $2 $400
Purchased 15/1/22 300 $3 $900
Sold 17/1/22 250
Purchased 28/1/22 500 $4 $2 000
Sold 30/1/22 400
Total 1 000 $3 300 650

Required:
A. Calculate ABC’s ending inventory and COGS at 31/1/22 under the
perpetual inventory system using:
1. FIFO 2. LIFO 3. Weighted Average
B. Prepare Closing entries relating to inventory for FIFO

50
 A1. Lecture Example – FIFO Perpetual

PURCHASES COGS ENDING STOCK/INV.

Date Units Unit Total Units Unit $ Total Units Unit $ Total
$ $ $ $
1/1 200 2 400
15/1 300 3 900 200 2 400
300 3 900
17/1 Sold 250 200 2 400
units 50 3 150 250 3 750
28/1 500 4 2000 250 3 750
500 4 2000
30/1 250 3 750 350 4 1400
150 4 600
TOTAL 1900 1400

51
 A2. Lecture Example – LIFO Perpetual

PURCHASES COGS ENDING STOCK/INV.

Date Units Unit Total Units Unit Total Units Unit Total cost
cost cost cost cost cost
1/1 200 2 400
15/1 300 3 900 200 2 400
300 3 900
17/1 Sold 250 200 2 400
units 250 3 750 50 3 150
28/1 500 4 2 000 200 2 400
50 3 150
500 4 2000
30/1 200 2 400
50 3 150
400 4 1600 100 4 400
TOTAL 2 350 950

52
 A3. Lecture Example – Moving Avg Perpetual
PURCHASES COGS ENDING INV.
Date Units Unit Total Units Unit Total Units Unit Total
cost cost cost cost cost cost
1/1 200 2 400
15/1 300 3 900 *500 2.60 1300
($400+$900)/(200+300)
= $2.60/unit

17/1 250 2.60 650 250 2.60 650

28/1 500 4 2 000 *750 3.53 2 650

($650+$2000)/(250+500)
= $3.53/unit

30/1 400 3.53 1413.33 350 3.53 1 236.63

TOTAL 2 063.33 1 236.67

53
B. Closing Entries

• Part of the closing process (illustration relates to FIFO).

Dr P&L Summary 1,900

Cr Cost of Goods Sold 1,900

54
Compare the Results

Periodic Perpetual
FIFO LIFO Weight FIFO LIFO Moving
Avg Avg
COGS 1,900 2, 450 2,145 1,900 2,350 2,063

Ending 1,400 850 1,155 1,400 950 1,238

Inv
Total 3,300 3,300 3,300 3,300 3,300 3,300

55
Choice of Method LO 4

• Depends on:
• Effect on the financial statements
• Information needs of management and financial
statement users
• Accounting standard requirements

• AASB Requirements:
• Where items are not ordinarily interchangeable, costs
should be assigned using specific identification.
• Otherwise, FIFO or weighted average must be used.
• LIFO is not permitted in Australia

56
 LO 8
Inventory Valuation

• AASB 102 states that inventory should be measured at

the lower of cost and net realisable value (also referred
to as lower of cost and market value ‘LCM’ Rule).

• AASB 102 definition of net realisable value:

• “…the estimated selling price in the ordinary course
of business less the estimated costs of completion
and the estimated costs necessary to make the
sale.”

• Any loss from the application of this rule is recorded as

an expense in the accounting period in which the write
down occurs.
57
 LO 8
LCM Rule - An Example
Question:
Assume that the cost of inventory for Co Y is calculated to be
$140,000. Imagine that:
(A) Net realisable value is $125,000 vs.
(B) Net realisable value is $200,000

Required:
For (A) and (B) prepare journal entries to apply the LCM rule
(A) Dr Inventory Loss / write-down expense 15,000
Cr Inventory 15,000

(B) No adjustment needed

58
 LO 8
Lower cost or market rule example

Item no. Units Unit Total Units Market Total LCM

cost cost market
675 5 x $50 = $250 5 x $45 = $225 $225
732 10 x $40 = $400 10 x $48 = $480 $400
957 15 x $55 = $825 15 x $30 = $450 $450
977 8 x $10 = $ 80 8 x $15 = $120 $ 80
Total 1 555 $1 275 1 155
 LO 9
Cost flow assumptions in practice
 LO 9
Cost flow assumptions in practice
Where are we now?
• Today we’ll be discussing

• What it is & what costs apply

• Differences between manufacturing vs retail
organisations
• Choices about how frequently to update inventory
records, & relevant journal entries (perpetual vs
periodic system)
• Choices in assumptions about the flow of inventory
in/out
• Choices specific to manufacturing organisations:
assigning costs to inventory produced (process vs job
order costing)
 LO 10
Why is cost allocation important?
Knowing the cost of products/services can help management
in many ways e.g.,
• Determining pricing
• Submitting tender for supply of goods or services

• Understanding the profitability of different products

• Decisions about introducing or deleting products
• Make or buy decisions

• Assessing the efficiency of production processes

• Aiding in product design

• Valuing inventory

63 63
 LO 10

Cost

Manufacturing Non-Manufacturing

Direct Indirect SG&A

DM DL MOH

64
First, some terminology
• Cost object: anything we want to know the cost of!
• Today it will be inventory ☺

• Costs can be direct or indirect to the cost object

• Direct costs can be traced to the cost object
• Direct (raw) material → physically part of the object
• Direct labour → work performed to transform the object

• Indirect costs (overhead) can’t be traced (or too costly to

trace) → need to be allocated → tricky!!!
• E.g., electricity, rent, supervisor salaries, cleaning,
insurance, and any materials that are so small that it is
not worth tracing them to the cost object

65
Cost measurement LO 10

• Costs can be measured using actual rates, or pre-

determined/budgeted rates
• In the case of overhead, often hard to use actual rates
• Information not available on a timely basis
• Rates can fluctuate with production
• Many businesses instead use pre-determined rates for
allocating overhead during the year, and make any
adjustments as needed at the end of the year
• The rate could be based on units produced, machine
hours, activities performed… The best base is one
that is most correlated with OH use
• More on this in advanced courses!
 LO 10

Different ways of measuring costs

Three combinations of actual and predetermined rate

Actual Normal Budgeted

Costing Costing Costing
Direct
Actual Actual Pre-determined
(DM, DL)

Indirect Actual Pre-determined Pre-determined

(MOH)

67 Adjust at YE

67
 Simple example – Normal costing
• Unigami Ltd makes origami unicorns and boats

• Each unicorn needs: 2 sheets of paper & 0.5 labour hours

• Each boat needs: 1 sheet of paper & 0.25 labour hours

• Paper costs $2.50 a sheet. Workers are paid $40/hr.

• At the start of the year, Unigami estimates that it will incur $210 000 in
manufacturing overhead, make 40 000 unicorns, & 20 000 boats.
• Unigami uses a normal costing system, and allocates manufacturing
overhead based on units produced.
• Unigami sets price equal to cost plus 50% mark up.

• Required: (1) What is the estimated cost of a unicorn?

• (2) What price will Unigami charge for each unicorn?

68
 Simple example – Normal costing
• Required:
• (1) What is the estimated cost of a unicorn?
• (2) What price will Unigami charge for each unicorn?

• (1)
• Each unicorn needs: 2 sheets of paper & 0.5 labour hours
• Paper costs $2.50 a sheet. Workers are paid $40/hr.

• Direct costs = (2 x $2.50) + (0.5 x $40) = $25

• Overhead rate = 210,000 / (40,000 + 20,000) = $3.50 per unit
• Total cost = $28.50

• (2) Price = cost x 1.5 = $42.75

69
How to Assign Costs - Costing systems LO 10
• Job order costing
– Assignment to distinct, identifiable products or services
e.g., consulting, advertising campaigns, weddings
– Direct costs are charged to each job as work is done
– OH is applied to each job using a predetermined rate
• Process costing
– Assignment to masses of homogenous products or
services e.g., Kellogg’s cereal, soft drink, magazines
– Costs are accumulated by process or department
– Unit cost = total manufacturing cost for the period
divided by units produced that period
• Job order and process costing are at either end of a
continuum of costing systems
 End of Lecture

Next Week:
Non-Current Assets