COST FLOW ASSUMPTIONS

Specific Identification
• Used for items that are not ordinarily
interchangeable or for items that are
individually unique and goods and services
produced and segregated for specific projects.
• Matches physical flow with cost flow
 FIFO
• Assumes that the items of inventory that were
purchased or produced first are sold first and
consequently the items remaining in inventory
at the end of the period are those most
recently purchased or produced.
 WEIGHTED AVERAGE
• Cost of each item is determined from the
weighted average of the cost of similar items
at the beginning of a period and the cost of
similar items purchased or produced during
the peiod.
 FIFO Periodic
• Weighted average is determined at the end of
the period using the following formula :

Total Goods Available in Pesos

Total Goods Available for Sale in Units
 FIFO Perpetual/Moving Average
• Weighted average cost is determined after
every purchase
 CASE PROBLEM
• SANA ALL posted the following
Jan. 1 Beginning Inv. 10,000 units P 20 per unit
Jan. 4 Purchase 15,000 units 22 per unit
Jan. 6 Sale 8,000 units N/A
Jan. 7 Purchase 10,000 units 28 per unit
Jan. 9 Sale 9,000 units N/A

Compute for the ending Inventory using the following:

• FIFO
• Weighted average – Perpetual/ Moving Average
• Weighted Average - PEriodic
 FIFO
Beginning Inventory : 10,000 units
Total Purchases : 25,000 units
Cost of Goods 35,000 units
available for sale:
Less: Total Sales 17,000 units
Ending Inventory 18,000 units

*10,000 x 28/ unit = P280,000

8,000 X 22/ unit = 176,000
Total Ending Inventory= P456,000
( The assumption is the first inventory purchased by the company was
also the first sold. Thus the latest purchases were included in the
remaining inventory)
Weighted average – Perpetual/ Moving Average

1.) Compute for the moving average before the

sale
• Beginning Inv. 10,000 unitsX P 20 = 200,000
• Purchase 15,000 units X 22 = 330,000
530,000
/ 25
Weighted Average Cost of Inventory = P21.2
After first purchase
REMAINING INVENTORY AFTER FIRST SALE:
10,000 units + 15,000 units – 8,000 units =
17,000 units

17,000 units X 21.2 = 360,400

Jan. 7 Purchase ( 10,000X28) = 280,000
640,400
/ 27,000
Weighted Average Cost of Inventory = 23.72
After second purchase
Beginning Inventory : 10,000 units
Total Purchases : 25,000 units
Cost of Goods 35,000 units
available for sale:
Less: Total Sales 17,000 units
Ending Inventory 18,000 units

Cost of Total Ending Inventory

18,000 units X 23.72/unit = 426,960
 WEIGHTED AVERAGE - PERIODIC
Beginning Inventory : 10,000 X 20 = 200,000
Purchase : 15,000 X 22 (Jan. 4) =330,000
Purchase : 10,000 X 28 (Jan. 7) =280,000
Cost of goods available for sale = 810,000
Divided by: Total Units available 35,000
For sale

Average cost of Inventory per Unit = 23. 14

Beginning Inventory : 10,000 units
Total Purchases : 25,000 units
Cost of Goods 35,000 units
available for sale:
Less: Total Sales 17,000 units
Ending Inventory 18,000 units

Cost of Total Ending Inventory

18,000 units X 23.14 /unit = 416,520
Subsequent Measurement
• Lower of Cost and Net Realizable Value

Net Realizable Value =

ESTIMATED SELLING PRICE – SELLING COSTS

Generally written down on Item by Item basis. In

some circumstances, it may be appropriate to a
group similar or related items.
• Note : RAW MATERIALS and MANUFACTURING
SUPPLIES held for use in the production of
inventories are not written down below cost if
the finished products in which they will be
incorporated are expected to be sold at above
cost.
 Reversal of Impairment
• Reversal is allowed, as long as amount of
reversal to be recognized should not exceed
the amount of original write-down previously
recognized.
 Purchase Commitment
• Obligation to purchase

• Specifies all significant terms, including the

price and timing of transactions
• Includes a disincentive for non-performance
that is sufficiently large to make performance
highly probable.
• If market prices decline, loss on purchase
commitment is recognized

• If market prices increase, gain on purchase

commitment is recognized
 SAMPLE PROBLEM
Kalat company reported the following for its product, Face
Mask

COST P 80
SALE PRICE P 100
SELLING COST P15
NORMAL PROFIT P20

How much should be reported as inventory in its financial

statements ?
COST : P 80
NET REALIZABLE VALUE : SALE PRICE – SELLNG
COSTS
P100- P15 = P85

LOWER OF COST AND NET REALIZABLE VALUE =

P 80
 Purchase Commitments
On November 15, 2017, Diamond Company
entered into a commitment to purchase 10,000
ounces of silver on February 15, 2018 at a price
of P310 per ounce.

On December 31, 2017, the market price of gold

is P270 per ounce. On February 15, 2018, the
price of gold is P300 per ounce
What is the loss on purchase commitment to
be recognized on December 31, 2017 ?

Forward price 310

Market price – December 31, 2017 270
Decrease in Price 40

Loss on purchase commitment 400,000

Estimated liability for purchase 400,000
commitment
What is the gain on purchase commitment to
be recognized on February 15, 2018 ?

Market price – December 31, 2017 300

Market price – February 15, 2018 270
Increase in price 30
• What amount should be debited to purchases on February
15, 2018 ? – P 3,000,000
• What amount should be recognized as accounts payable on
February 15, 2018 ? - P 3,100,000

Purchases ( 10,000X300) 3,000,000

Estimated liability on purchase 400,000
commitment
Accounts Payable ( 10,000 x 310) 3,100,000
Gain on purchase commitment 300,000

• Accounts Payable = Forward Price (P310)

• Purchases = Market Price ( P300)