So, you want to learn
Bookkeeping!
Merchandise Inventory
by Bean Counter's Dave Marshall

Lesson 2
Costing Methods


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter
Just like our cartoon fellow with the ice cream cone with many different flavors, there are different costing methods that you may choose to value your inventory.

Both the Perpetual and Periodic Inventory Methods require you to calculate and assign (attach) cost to the Ending Inventory. Knowing the quantities on hand is only half the battle. If the purchases of items were always made at the same cost (which is not the real world case) our job would be simple. Use this cost and multiply by the quantity on hand and you'd have the cost assigned to the item.

Since this is not normally the case, purchases are more often made at various prices, we have to determine what costs are assigned to our units (quantity) on hand (ending inventory), and what cost are assigned to our units (quantity) of items sold. So our problem becomes what cost do I use to value my inventory when my business has made purchases of the same item at different costs. Let's revisit our example from Lesson 1.

Example
Product: Super Widget
Purchases:

Quantity Unit Cost
100 $10.00
300 $9.00
200 $11.00

Do I use $10.00, $9.00, $11.00 ,an average or what to assign cost to my cost of goods sold and/or ending inventory ? I told you in Lesson 1 we would revisit this question.

I know, you're probably wondering what the heck is a widget. I did too when I was taking my introductory accounting courses in college. A widget is just a term used to mean any type of product imaginable. So many times, instead of using a specific product such as toy dolls, lawn mowers, etc. in examples, we just refer to our product as widgets.

Costing Products In A Nutshell

Calculating and determining costs assigned to Ending Inventory and Cost Of Units Sold is really just a matter of applying some good ole logic and common sense.

It's basically just involves three steps.

  1. Select a Method(s) Of Accounting for Inventory.
    • Periodic
    • Perpetual
  2. Determine the Total Product Costs and Total Units To Account For.
  3. Assign Costs To Ending Inventory and Cost Of Goods Sold based on a consistent method of valuing inventory (Costing Method).
    • Specific Identification
    • FIFO -First-in First-out
    • LIFO -Last-in First-out
    • Average Cost

    If the Periodic Method is used a Physical Count of the Items is Required

Class dismissed ! Just kidding, although that's all that really needs to be done, but I realize that we still need to learn how to do it. We discussed the Periodic and Perpetual Inventory Methods in Lesson 1. This Lesson will concentrate on the methods of costing and hopefully enlighten you as to what the methods are and how to use them.

We'll first discuss the different methods and their calculations and later in the lesson provide some examples that will illustrate how to perform the calculations necessary for using the different Inventory Costing Methods.

Specific Identification
If we could, the best matching of our revenue and costs would be accomplished by determining the specific cost of the item that was sold or that we still had on hand. For some high dollar and uniquely identifiable items this can easily be accomplished. Can you think of a few product examples. How about automobiles, boats, and custom jewelry to name a few. These item usually have a unique product ID (identification number) assigned to them. In the case of automobiles, all vehicles have a unique serial number.

What about items that are exactly the same ? This makes identifying which items were sold and which are still on hand difficult. If we bought them at different times and at different prices how can we easily determine which units were sold or on hand ? Not by looking at them - they all look exactly the same.

Due the fact that in most cases its hard to determine what specific item was sold, we rely on some assumptions, when it's not feasible to use Specific Identification, for determining which items were sold and which are still on hand. These assumptions are referred to as Cost Flows or Costing Methods.

The following Cost Flows or Methods , FIFO, LIFO, and Average Cost are used in practice to assign costs to ending inventories and cost of items sold. What do we mean by flow ? The flow refers to the flow of the cost of inventory items into the business when items are purchased and the flow of the cost of inventory items out of the business when items are sold.

What the heck do those strange abbreviations mean ?

Description Of Additional Costing Methods (Cost Flows)

FIFO is an abbreviation for the first-in, first-out method of assigning costs to ending inventory and the cost of items sold. The FIFO inventory method assumes that costs are matched with revenue in the order in which they are incurred. In others words, the first goods purchased are the first goods sold. The effect of this method is that the most recent costs incurred remain in the Ending Inventory while the first (oldest) costs are used to assign costs to the goods that are sold. Costs assigned to our beginning of the year inventory (earliest purchases) are assigned to goods sold first and then cost associated with the first (oldest) purchases during the year (period) are use to assign costs to the goods sold. Using this method with either the Perpetual or Periodic System will produce the same results.

The FIFO cost flow assumption actually closely matches the actual cost flow in and out of many types of businesses. Many businesses try to sell their oldest goods first. Grocery stores (if the oldest goods are not sold first many of their products will perish) and clothing goods stores are just a couple of examples. Selling the oldest products first also helps reduce the loss from products losing value due to obsolescence.

LIFO is an abbreviation for the last-in, first-out method of assigning costs to ending inventory and the cost of items sold. The LIFO method assumes that the last items purchased are the first items sold. The effect of this method is that the oldest goods purchased (earliest) and their assigned costs make up the Ending Inventory while the most recent goods purchased and their unit costs are used to assign costs to the cost of units sold.

In realty, there are not many instances where the actual flow of goods into and out of a business adhere to the last-in first-out cost flow assumption. The use of the LIFO costing method is influenced by the tax savings resulting during periods of rising prices. Due to using the newest unit costs, which when prices are rising, are higher the costs assigned to the costs of the units sold (Cost Of Goods Sold) are higher which results in a lower reported profit. Since income taxes are calculated based on profits, a lower profit results in less taxes being paid.

IRS Rules Relating to the LIFO Method
Any taxpayer may elect the LIFO method for assigning cost to any or all of his inventory items.
Once elected, the LIFO method must continue to be used in future periods unless a change of method is applied for and granted by the IRS.
Form 970, Application To Use LIFO Inventory Method must be submitted with your timely filed tax return for the year that you adopt LIFO as your inventory method.
A taxpayer must adhere to two restrictions for the portions of its inventory valued using the LIFO method.

  • The inventory is to be valued at cost regardless of market value.
  • The general rule is that the taxpayer may not use a different method in determining financial results for external reports. If LIFO is used for tax purposes, it must also be used for financial reporting purposes. Specific exceptions to this general rule exist to allow for reporting additional financial information using assumptions other than strictly LIFO.

Average Cost (no strange abbreviation here) makes no effort to identify the actual flow of cost in and out of the business. Instead costs and quantities are "pooled" and an average is calculated that is used to determine the amount assigned to inventory and the cost of the items sold. All items in Merchandise Inventory at any time are assumed to have the same unit average cost. This method assumes that the same cost per unit (average cost) is assigned to items on hand and remaining in inventory as to items that were sold.

The IRS sometimes questions the use of the average method.

Specific Identification (no wild abbreviation here either)
We discussed this method earlier. Specific Identification uses the actual flow of the goods purchased and sold to assign cost to inventory and cost of the units sold.

Quick Overview of Cost Methods (Flow Assumptions) and Calculations

This section provides a quick overview and explanations of the costing methods and how they're used with the different inventory methods. In order to introduce the calculations, only the FIFO and LIFO costing methods used with the Periodic Inventory Method are illustrated with examples. Don't get excited, later sections provide ample examples of using all the costing methods with the Perpetual and Periodic Inventory Methods.

Often a picture or diagram helps to illustrate a principle or concept. Below is a diagram that illustrates the difference between the FIFO and LIFO Cost Flow Assumptions.

Our Assumptions:

  • Each Purchase and Sale represents One (1) Unit. In other words, we purchased a total of 5 units of our product and sold two which if my math is correct leaves us with 3 units On Hand.
  • The blocks numbered 1-5 represent our first, second, third, fourth, and fifth purchase respectively.
  • The First Row Goods Purchased represents five purchases made the oldest (first) represented by the number 1 and the newest (last) being represented by the number 5.
  • The Second Row, Cost Of Goods Purchased, represents the unit cost of each Purchase.
  • The Third and Fourth Rows, Goods Sold, represent the first sale, Sale Number 1 -Goods Sold (1), and the second sale, Sale Number 2 -Goods Sold (2).
  • The Fifth Row represents the Purchases that are still assumed to be On Hand and in our Ending Inventory.
  • The Last Row represents the Cost of Purchases that are still assumed to be On Hand and in our Ending Inventory.

FIFO- First In First-Out
Assumes the oldest items are sold first and ending inventory contains our newest items.

 
Oldest Sold
First
_____________________________
Newest Sold
Last
Goods Purchased
1
2
3
4
5
Cost Of Goods Purchased
$2.00
$2.10
$2.20
$2.30
$2.40
Goods Sold (1)
1
 
Goods Sold (2)
 
2
   
On Hand
   
3
4
5
On Hand-Dollars
   
$2.20
$2.30
$2.40

Let's calculate the cost assigned to our Ending Inventory of 3 Units using the FIFO Cost Flow Assumption.

Using the FIFO Cost Flow Assumption, the earliest (oldest or first) purchases are sold first and the newest (last) remain on hand and in our Ending Inventory.

Then our first sale is Purchase- 1 and our second sale is Purchase- 2.

Since we now have 3 Units On Hand (Ending Inventory), we need to work backward from our newest (last) purchases in order to calculate our Ending Inventory Value.

Our Ending Inventory is Calculated as follows:

Purchase 5 $2.40
Purchase 4 $2.30
Purchase 3 $2.20
Total $6.90

We started with our most recent purchase (newest), Purchase 5, and worked backward to Purchase 4 and then to Purchase 3 in order to arrive at our Ending Inventory Value.

LIFO- Last-In First-Out
Assumes the newest items are sold first and ending inventory contains our oldest items.

 
Oldest Sold
Last
_____________________________
Newest Sold
First
Goods Purchased
1
2
3
4
5
Cost Of Goods Purchased
$2.00
$2.10
$2.20
$2.30
$2.40
Goods Sold (1)
       
5
Goods Sold (2)
     
4
 
On Hand
1
2
3
       
On Hand
$2.00
$2.10
$2.20
       

Now let's calculate the cost assigned to our Ending Inventory of 3 Units using the LIFO Cost Flow Assumption.

Using the LIFO Cost Flow Assumption, the newest (last) purchases are sold first and the earliest (oldest or first) remain on hand and in our Ending Inventory.

Then our first sale is Purchase- 5 and our second sale is Purchase- 4.

Since we have 3 Units On Hand (Ending Inventory), we need to work forward from our earliest (oldest or first) purchases in order to calculate our Ending Inventory Value.

Our Ending Inventory is Calculated as follows:

Purchase 1 $2.00
Purchase 2 $2.10
Purchase 3 $2.20
Total $6.30

We started with our oldest purchase, Purchase 1, and worked forward to Purchase 2 and then to Purchase 3 in order to arrive at our Ending Inventory Value.

Additional Explanations and Calculations

Now that you have a basic idea of what we're talking about, we'll take a look at some additional examples of using FIFO and LIFO costing methods with the Periodic Inventory System. We'll also briefly discuss the use of the Perpetual Inventory Method with FIFO and LIFO and the other Costing Methods, Average Cost and Specific Identification.

FIFO-First-in First-out

  • FIFO Periodic - no detailed stock record (Subsidiary Ledger) is maintained. FIFO when used with the Periodic Method performs the calculations and assigns cost to Cost Of Goods Sold and Ending Inventory after a Physical Inventory is taken at the end of your accounting year.

Of course our first step is taking a physical inventory of the goods on hand as of the end of our year (period).

After we have the quantity, we need to assign costs to the cost of units that were sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory). With FIFO and the Periodic Inventory Method the main emphasis is first on calculating the cost assigned to the Ending Inventory.

We need to work backward from our most recent purchases (supplier invoices) in order to gather the unit cost(s) to use for valuing our ending inventory. Since the FIFO Costing Method assumes that the oldest goods are sold first, then the goods on hand would have the newest costs assigned to them.

The logic behind calculating the assigned costs to Inventory using the Periodic Method and FIFO is really quite simple. If the first goods purchased are the first goods to "go out the door" (sold), it logically follows that the last goods purchased are the goods that make up the Ending Inventory. All we need to do is find the units cost(s) that relate to these purchases and multiply by the quantities.

After the Ending Inventory is calculated the Cost Of Goods Sold is calculated by subtracting the Ending Inventory Calculated Amount from the Total Costs To Account For Amount (Beginning Inventory + Purchases).

Let's use an example to illustrate the calculations.

Assumptions:

  • Beginning Inventory 20 units @ $8.00
  • Purchases During The Year Listed in the order incurred (oldest to newest) with their quantities, unit costs, and total dollars amounts.
10 @ $8.25 $82.50
20 @ $8.50 $170.00
30 @ $8.60 $258.00
15 @ $8.65 $129.75
   
75 units $640.25
  • Ending Inventory On Hand- 35 units (calculated by counting the items)

Let's calculate out Total Units and Costs To Account For.
Our total units and costs include our units and dollars included in our beginning inventory and our units and dollars purchased during our year. The extra units and dollars in our table below are due to including our Beginning Inventory amounts.

The items are listed in order of the oldest to the newest. Why is our Beginning Inventory the first item listed ? The answer should be obvious. Our Beginning Inventory is the units and amounts carried over to our new year from our Ending Inventory Amounts of our prior year. Since our Beginning Inventory is made up of prior year purchase amounts , the oldest purchases are contained in our Beginning Inventory Amounts.

Beginning Inventory  
20 @ $8.00 $160.00
   
Purchases-Current Year  
10 @ $8.25 $82.50
20 @ $8.50 $170.00
30 @ $8.60 $258.00
15 @ $8.65 $129.75
   
   
Totals To Account For  
95 units $800.25

Let's next assign our costs to our Ending Inventory of 35 units obtained from our Physical Inventory (count of goods on hand).

Remember, we work backward from our newest to our earliest purchase unit costs in order to obtain the unit costs needed for assigning costs to our 35 units of Ending Inventory.

(1) Our first calculation accounts for 15 of our 35 units at a cost of $8.65 per unit and a total amount of $129.75. We now have 20 units still remaining that we need to assign costs to.
(2) Still working backward, we determine that the 20 units are assigned a cost of $8.60 per unit and a total amount of $172.00.

Since all 35 units of our Ending Inventory have been accounted for, our task of assigning costs to our Ending Inventory is complete.

Description Total Dollars Ending Inventory Calculation
Beginning Inventory      
20 @ $8.00 $160.00    
       
Purchases-Current Year      
10 @ $8.25 $82.50    
20 @ $8.50 $170.00    
30 @ $8.60 $258.00 (2) 20 @ $8.60 $172.00
15 @ $8.65 $129.75 (1) 15 @ $8.65 $129.75
       
75 Purchased Units $640.25    
       
       
Totals To Account For      
95 Units $800.25 35 units- Ending Inventory $301.75

Calculation Of Cost Of Goods Sold
As I stated earlier, after the Ending Inventory is calculated the Cost Of Goods Sold is calculated by subtracting the Ending Inventory Calculated Amount from the Total Costs To Account For Amount (Beginning Inventory + Purchases).

  Purchased Dollars Purchased Units
Beginning Inventory $160.00 20
Purchases $640.25 75
Total Cost and Units To Account For $800.25 95

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
     
Total Dollars and Units To Account For $800.25 95
Less: Costs and Units Assigned To Ending Inventory 301.75 35
Costs and Units Assigned To Cost Of Goods Sold $498.50 60
  • FIFO Perpetual - a detailed stock record card (Subsidiary Ledger) is maintained that records a running balance of the items and dollar value on hand, purchase quantities and unit costs, and quantities sold at what unit costs. FIFO when used with the Perpetual Method performs calculations at the time of each purchase and sale. Costs are assigned to Cost Of Goods Sold at the time the goods are sold and the new reaming On Hand Balance is calculated by subtracting the costs of the items sold from the prior On Hand Balance.

With FIFO and the Perpetual Inventory Method the main emphasis is first on calculating the cost assigned to the Cost Of Goods Sold. The remaining on hand balance is calculated by subtracting the amount sold from the Prior On Hand Balance (Inventory Balance Before The Sale Occurred).

Note:A detailed example illustrating FIFO and the Perpetual Inventory Method is presented later in this lesson.

LIFO-Last-in First-out

  • LIFO Periodic - no detailed stock record (Subsidiary Ledger) is maintained. LIFO when used with the Periodic Method performs the calculations and assigns cost to Cost Of Goods Sold and Ending Inventory after a Physical Inventory is taken at the end of your accounting year.

Of course our first step is taking a physical inventory of the goods on hand as of the end of our year (period).

After we have the quantity, we need to assign costs to the cost of units that were sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory). With LIFO and the Periodic Inventory Method the main emphasis is first on calculating the cost assigned to the Ending Inventory.

We need to work forward from our earliest (oldest) purchases (supplier invoices) in order to gather the unit cost(s) to use for valuing our ending inventory. Since the LIFO Costing Method assumes that the newest goods are sold first, then the goods on hand would have the earliest (oldest) costs assigned to them.

The logic behind calculating the assigned costs to Inventory using the Periodic Method and LIFO is really quite simple. If the last goods purchased are the first goods to "go out the door" (sold), it logically follows that the earliest (oldest) goods purchased are the goods that make up the Ending Inventory. All we need to do is find the units cost(s) that relate to these purchases and multiply by the quantities.

After the Ending Inventory is calculated the Cost Of Goods Sold is calculated by subtracting the Ending Inventory Calculated Amount from the Total Costs To Account For Amount (Beginning Inventory + Purchases).

Our example to illustrate the calculations follows.

Assumptions:

  • Beginning Inventory 20 units @ $8.00
  • Purchases During The Year Listed in the order incurred (oldest to newest) with their quantities, unit costs, and total dollars amounts.
10 @ $8.25 $82.50
20 @ $8.50 $170.00
30 @ $8.60 $258.00
15 @ $8.65 $129.75
   
75 units $640.25
  • Ending Inventory On Hand- 35 units (calculated by counting the items)

Let's calculate out Total Units and Costs To Account For.
Our total units and costs include our units and dollars included in our beginning inventory and our units and dollars purchased during our year. The extra units and dollars in our table below are due to including our Beginning Inventory amounts.

The items are listed in order of the oldest to the newest. Why is our Beginning Inventory the first item listed ? The answer should be obvious. Our Beginning Inventory is the units and amounts carried over to our new year from our Ending Inventory Amounts of our prior year. Since our Beginning Inventory is made up of prior year purchase amounts , the oldest purchases are contained in our Beginning Inventory Amounts.

Beginning Inventory  
20 @ $8.00 $160.00
   
Purchases-Current Year  
10 @ $8.25 $82.50
20 @ $8.50 $170.00
30 @ $8.60 $258.00
15 @ $8.65 $129.75
   
   
Totals To Account For  
95 units $800.25

Let's next assign our costs to our Ending Inventory of 35 units obtained from our Physical Inventory (count of goods on hand).

Remember, we work forward from our earliest (oldest) to our newest purchase unit costs in order to obtain the unit costs needed for assigning costs to our 35 units of Ending Inventory.

(1) Our first calculation accounts for 20 of our 35 units at a cost of $8.00 per unit and a total amount of $160.00. We now have 15 units still remaining that we need to assign costs to.
(2) Still working forward, we determine that the next 10 units are assigned a cost of $8.25 per unit and a total amount of $82.50. We now have 5 units still remaining that we need to assign costs to.
(3) Still working forward, we determine that the last 5 units are assigned a cost of $8.50 per unit and a total amount of $42.50.

Since all 35 units of our Ending Inventory have been accounted for, our task of assigning costs to our Ending Inventory is complete.

Description Total Dollars Ending Inventory Calculation
Beginning Inventory      
20 @ $8.00 $160.00 (1) 20 @ $8.00 $160.00
       
Purchases-Current Year      
10 @ $8.25 $82.50 (2) 10 @ $8.25 $82.50
20 @ $8.50 $170.00 (3) 5 @ $8.50 $42.50
30 @ $8.60 $258.00    
15 @ $8.65 $129.75    
       
75 Purchased Units $640.25    
       
       
Totals To Account For      
95 Units $800.25 35 units- Ending Inventory $285.00

Calculation Of Cost Of Goods Sold
As I stated earlier, after the Ending Inventory is calculated the Cost Of Goods Sold is calculated by subtracting the Ending Inventory Calculated Amount from the Total Costs To Account For Amount (Beginning Inventory + Purchases).

  Purchased Dollars Purchased Units
Beginning Inventory $160.00 20
Purchases $640.25 75
Total Cost and Units To Account For $800.25 95

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
     
Total Dollars and Units To Account For $800.25 95
Less: Costs and Units Assigned To Ending Inventory 285.00 35
Costs and Units Assigned To Cost Of Goods Sold $515.25 60
  • LIFO Perpetual - a detailed stock record card (Subsidiary Ledger) is maintained that records a running balance of the items and dollar value on hand, purchase quantities and unit costs, and quantities sold at what unit costs.

LIFO when used with the Perpetual Method performs calculations at the time of each purchase and sale. Costs are assigned to Cost Of Goods Sold at the time the goods are sold and the new remaining On Hand Balance is calculated by subtracting the costs of the items sold from the prior On Hand Balance.

Note:A detailed example of using LIFO with the Perpetual Method is presented later in this lesson.

Average Cost
An average cost is calculated using a weighted average method with periodic inventory systems and a moving average method with perpetual inventory systems.

Weighted Average Method - Periodic Inventory Method
Periodic - no detailed stock record (Subsidiary Ledger) is maintained.

Weighted Average Cost is simply the total cost of items available for sale divided by the total number of units available for sale.

  • Total Cost of Items Available For Sale = Beginning Inventory Value + Purchases
  • Total Units (Quantities) Available For Sale = Beginning Inventory Units + Purchased Units
  • Weighted Average Cost Per Unit = Total Cost Of Items Available For Sale / Total Units Available For Sale

This Weighted Average Cost Per Unit is then multiplied by the quantity of inventory on hand to determine the value (costs assigned) of the ending inventory.

Moving Average Method - Perpetual Inventory Method
A detailed stock record card (Subsidiary Ledger) is maintained that records a running balance of the items and dollar value on hand, purchase quantities and unit costs, and quantities sold at what unit costs.

Average when used with the Perpetual Method performs calculations at the time of each purchase and sale. Costs are assigned to Cost Of Goods Sold at the time the goods are sold.

Moving Average is calculated in the same manner as the Weighted Average except that a new average unit cost is calculated each time a purchase is made. The costs of a new purchase are added to the prior value of the perpetual inventory and divided by the number of units on hand prior to the purchase plus the items currently purchased. Items sold are issued at the current value of the calculated moving average.

  • Total Costs To Account For = Prior Costs Assigned to the Inventory (Prior To New Purchase) + Current Purchase
  • Total Units To Account For = Prior Units On Hand (Prior To New Purchase) + Current Units Purchased
  • Current Moving Average Cost Per Unit = Total Costs To Account For / Total Units To Account For

This Current Moving Average Cost Per Unit is then multiplied by the quantity of any items sold and assigned to the cost of the units sold (Cost Of Goods Sold). Any items still on hand are also valued at this current moving average cost per unit.

The Current Moving Average Cost Per Unit is recalculated each time a new purchase is made.

Note:Detailed examples of using the average costing method with the perpetual and periodic methods are presented later in this lesson.

Specific Identification costs are calculated from the actual cost of the item obtained from your inventory or purchasing records.

Periodic Inventory Method uses this actual cost to assign costs to the ending inventory value when a physical inventory is taken.
Perpetual Inventory Method uses this actual cost to assign cost to the Cost Of Goods Sold ( cost of the units sold) and for updating the remaining balance of the inventory still on hand at the time the product is sold.

Note:A detailed example of the Specific Identification Method is presented later in this lesson.

Calculations Using the Perpetual and Periodic Inventory System

See, I didn't fib. I told you earlier that we'd take a look at all the Costing Methods and how they're used with the Perpetual and Periodic Method. Our earlier examples dealt mainly with the FIFO and LIFO Costing Methods used with the Periodic Inventory Method. On your mark, get set, and here we go.

The following information about our product Super Widget will be used to illustrate the record keeping and calculations involved using the Periodic and Perpetual Inventory Methods and the different Costing Methods (Cost Flow Assumptions).

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Sales of Super Widgets made during the year at a constant selling price of $15.00 throughout the year are as follows:
Date Quantity Sold Sales Amount
January 20, xxxx 100 1,500
March 30, xxxx 200 3,000
June 5, xxxx 150 2,250
June 30, xxxx 70 1,050
October 20, xxxx 100 1,500
December 15, xxxx 90 1,350
December 31, xxxx 140 2,100
   
Total Sales 850 12,750
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Our analysis, will look at the systems assuming that the purchase cost is increasing (Rising Prices) during the period and later in this Lesson take a look at the results when the cost of the item purchased is decreasing (Decreasing Prices) during the period.

As you can easily determine from our Purchases Table we'll first be dealing with the different Costing Methods assuming Rising Prices. Costs increase from $8.25 per unit to $9.00 per unit during the period.

Rising Prices

FIFO - First-in First-out
We're first going to take a look at the FIFO Costing Method used with the Perpetual and Periodic Inventory Methods.

FIFO with the Perpetual Inventory Method

By now, you should know that the Perpetual Inventory Method requires us to maintain detail inventory records. The main record(s) is the Stock Record Card(s) also referred to as the Subsidiary Product Ledger. A detail stock record (ledger card) is maintained for each product that uses the Perpetual Inventory Method. If we use the perpetual inventory for five of our products we'll have five ledger cards. If we use the method for one hundred of our products how many stock record cards will we have ? If you answered anything but one hundred I'm sorry but I'm going to have to put the dunce cap on you and send you to the corner. These detail cards (subsidiary ledgers) maintain a "running" current balance of the quantity and cost of the items we have on hand.

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming a FIFO Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 8.25 1,650   2,450
100 @ $8.00
200 @ $8.25
Jan 20, xxxx   100 200     800
100 @ $8.00
1,650
200 @ $8.25
Mar 5, xxxx 300   500 8.50 2,550   4,200
200 @ $8.25
300 @ $8.50
Mar 30, xxxx   200 300     1,650
200 @ $8.25
2,550
300 @ $8.50
Jun 5, xxxx   150 150     1,275
150 @ $8.50
1,275
150 @ $8.50
Jun 30, xxxx   70 80     595
70 @$8.50
680
80 @ $8.50
Sep 10, xxxx 200   280 8.75 1,750   2,430
80 @ $8.50
200 @ $8.75
Oct 20, xxxx   100 180     855
80 @ $8.50
20 @ $8.75
1,575
180 @ $8.75
Dec 15, xxxx   90 90     787.50
90 @ $8.75
787.50
90 @ $8.75
Dec 20, xxxx 150   240 9.00 1,350   2,137.50
90 @ $8.75
150 @ $9.00
Dec 31, xxxx   140 100     1,237.50
90 @ $8.75
50 @ $9.00
900
100 @ $9.00
Totals 850 850     7,300 7,200
 

(1) Our first entry on our Stock Ledger Card is our beginning inventory which is 800 units at a cost of $8.00 each resulting in a beginning value of $800. These units and costs were carried over from our prior year ending balances.

(2) Our second entry is our Jan 15, xxxx purchase of 200 units at a unit cost of $8.25. We now have two cost "layers" of inventory totalling 300 units with a total cost assigned of $2,480 composed of our original beginning balance of 100 units @ $8.00 and our new layer of 200 units @ $8.25.

(3) Our third entry is our Jan 20, xxxx sale of 100 units. Since we are using the FIFO (First-in First-out) Cost Flow method, the 100 units sold come from our oldest purchases which in this case represent the 100 units from our beginning inventory. The 100 units sold are assigned an $8.00 per unit cost cost which is the cost assigned to our oldest units. Our remaining balance is now made up of only one layer of 200 units @ $8.25 for a total cost of $1,650.

The remaining purchase and sales transactions included in our Stock Record Card follow the same logic. Cost layers are added with purchases and decreased by sales from our oldest cost layer(s).

The yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

FIFO with the Periodic Inventory System

Of course our first step is taking a physical inventory of the goods on hand as of the end of our year (period). After counting our Super Widgets, we recorded 100 units on our count sheet.

Now that we have the quantity, we need to assign costs to the cost of units that were sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory). We need to work backward from our most recent purchases (supplier invoices) in order to gather the unit cost(s) to use for valuing our ending inventory. Since the FIFO Costing Method assumes that the earliest (oldest) goods are sold first, then the goods on hand would have the newest costs assigned to them.

Fortunately, as I recommended in Lesson 1, although not absolutely necessary in our example we maintained a detail record of our purchases for the year. If we had not, we would have to dig through supplier invoices in order to find the unit cost(s) to use. This can be a very time consuming process. Why ? Just think of all the supplier invoices you receive in a year. To make matters worse, most invoices contain many products that are billed on the same invoice.

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

From our schedule or search and analysis of invoices, our newest invoice is from our supplier Acme Products, dated December 20, xxxx, Invoice Number B-789012, for 150 units at a unit cost of $9.00. Since we only have 100 units remaining in our ending inventory, we lucked out.

All our Super Widgets will be assigned a unit cost of $9.00 using the unit cost from Invoice Number B-789012 dated December 20, xxxx resulting in an Ending Inventory Value of $900.00 (100 units @ $9.00).

Using the data from our Schedule, the calculation of the cost assigned to our units sold (Cost Of Goods Sold) is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800 100
Purchases $7,300 850
Total Cost and Units To Account For $8,100 950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
Total Dollars and Units To Account For $8,100.00 950
Less: Costs and Units Assigned To Ending Inventory 900.00 100
Costs and Units Assigned To Cost Of Goods Sold $7,200.00 850

Let's make one additional assumption in order to illustrate assigning cost to the ending inventory. We're going to assume that we had two more purchases at the end of our year.

Our New Purchases Schedule

  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
December 27, xxxx 20 $9.50 190 578643 Alternate Products
December 30, xxxx 25 $10.00 250 654189 Alternative Products
       
Total Purchases 895   7,740

Assuming our same Ending Inventory of 100 units on hand. In this case, working backward from our newest (invoices) are calculation for assigning costs to our 100 units would be as follows:

25 units @ $10.00 = $250 Invoice 654189 Dec 30, xxxx
20 units @ $9.50 = $190 Invoice 578643 Dec 27, xxxx
55 units @ $9.00 = $495 Invoice B-789012 Dec 20, xxxx
     
100 units = $935  

The logic behind calculating the assigned costs to Inventory using the Periodic Method and FIFO is really quite simple. If the first goods purchased are the first goods to "go out the door" (sold), it logically follows that the last goods purchased are the goods that make up the Ending Inventory. All we need to do is find the units cost(s) that relate to these purchases and multiply by the quantities. Often this is easier said than done unless we maintain detailed records for our purchases.

LIFO - Last-in First-out
Now we're going to take a look at the LIFO Costing Method used with the Perpetual and Periodic Inventory Methods.

LIFO with the Perpetual Inventory Method

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming a LIFO Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 8.25 1,650   2,450
100 @ $8.00
200 @ $8.25
Jan 20, xxxx   100 200     825
100 @ $8.25
1,625
100 @ $8.00
100 @ $8.25
Mar 5, xxxx 300   500 8.50 2,550   4,175
100 @ $8.00
100 @ $8.25
300 @ $8.50
Mar 30, xxxx   200 300     1,700
200 @ $8.50
2,475
100 @ $8.00
100 @ $8.25
100 @ $8.50
Jun 5, xxxx   150 150     1,262.50
100 @ $8.50
50 @ $8.25
1,212.50
100 @ $8.00
50 @ $8.25
Jun 30, xxxx   70 80     572.50
50 @ $8.25
20 @ $8.00
640
80 @ $8.00
Sep 10, xxxx 200   280 8.75 1,750   2,390
80 @ $8.00
200 @ $8.75
Oct 20, xxxx   100 180     875
100 @ $8.75
1,515
80 @ $8.00
100 @ $8.75
Dec 15, xxxx   90 90     787.50
90 @ $8.75
727.50
80 @ $8.00
10 @ $8.75
Dec 20, xxxx 150   240 9.00 1,350   2,077.50
80 @ $8.00
10 @ $8.75
150 @ $9.00
Dec 31, xxxx   140 100     1,260.00
140 @ $9.00
817.50
80 @ $8.00
10 @ $8.75
10 @ $9.00
Totals 850 850     7,300 7,282.50
 

(1) Our first entry on our Stock Ledger Card is our beginning inventory which is 800 units at a cost of $8.00 each resulting in a beginning value of $800. These units and costs were carried over from our prior year ending balances.

(2) Our second entry is our Jan 15, xxxx purchase of 200 units at a unit cost of $8.25. We now have two cost "layers" of inventory totalling 300 units with a total cost assigned of $2,480 composed of our original beginning balance of 100 units @ $8.00 and our new layer of 200 units @ $8.25.

(3) Our third entry is our Jan 20, xxxx sale of 100 units. Since we are using the LIFO (Last-in First-out) Cost Flow method, the 100 units sold come from our newest purchases which in this case represent 100 units from our purchase made Jan 15, xxxx. The 100 units sold are assigned an $8.25 per unit cost cost which is the cost assigned to our newest units. Our remaining balance is now made up of 200 units with a total cost assigned of $1,625 composed of our original beginning balance of 100 units @ $8.00 and 100 @ $8.25 units remaining in our second (most current) layer.

The remaining purchase and sales transactions included in our Stock Record Card follow the same logic. Cost layers are added with purchases and decreased by sales from the most current cost layer(s).

The yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

LIFO with the Periodic System

Of course our first step is taking a physical inventory of the goods on hand as of the end of our year (period). After counting our Super Widgets, we recorded 100 units on our count sheet.

Now that we have the quantity, we need to assign costs to the cost of units that were sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory). We worked backward in our example of FIFO with the Periodic Inventory Method.

This time, we're going to work forward beginning with the oldest purchases (supplier invoices) in order to gather the unit cost(s) to use for valuing (assigning cost) to our Ending Inventory.

Since the LIFO Inventory Method assumes that the newest (last) goods purchased are sold first, then logically the goods on hand (Ending Inventory) would have the earliest (oldest) cost assigned.

Fortunately, as I recommended in Lesson 1, although not absolutely necessary in our example we maintained a detail record of our purchases for the year. If we had not, we would have to dig through supplier invoices in order to find the unit cost(s) to use. As I stated earlier, this can be a real time consuming "hassle".

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Working forward (from the oldest to the newest) from our schedule or search and analysis of our beginning inventory and invoices, our first oldest or earliest purchase is represented by our Beginning Inventory. By chance, the beginning balance is made up of 100 units with a unit cost of $8.00.

We lucked out. Since we only need to find the unit cost for 100 units from our count and that make up our Ending Inventory, the Beginning Inventory unit cost of $8.00 per unit is the only unit cost we need to assign cost to our units on hand and remaining in Inventory.

All our Super Widgets (100 in inventory) are assigned a unit cost of $8.00 resulting in an Ending Inventory Value of $800.00 (100 units @ $8.00).

Using the data from our Schedule, the calculation of the cost assigned to our units sold (Cost Of Goods Sold) is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800 100
Purchases $7,300 850
Total Cost and Units To Account For $8,100 950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
Total Dollars and Units To Account For $8,100.00 950
Less: Costs and Units Assigned To Ending Inventory 800.00 100
Costs and Units Assigned To Cost Of Goods Sold $7,300.00 850

Let's make one additional assumption in order to illustrate assigning cost to the ending inventory. We're going to assume that we had only had 40 units at a unit cost of $8.00 in our Beginning Inventory.

In this case, working forward from our earliest beginning inventory and purchases (invoices) are calculation for assigning costs to our 100 units would be as follows:

40 units @ $8.00 = $320
60 units @ $8.25 = $495
   
100 units = $815

The logic behind calculating the assigned costs to Inventory using the Periodic Method and LIFO is really quite simple. If the last goods purchased are the first goods to "go out the door" (sold), it logically follows that the earliest goods purchased are the goods that make up the Ending Inventory. All we need to do is find the units cost(s) that relate to these purchases and multiply by the quantities. Often this is easier said than done unless we maintain detailed records for our purchases.

Average Costing Method
Lastly, we're going to take a look at the Average Costing Method used with the Perpetual and Periodic Inventory Methods.

Moving Average with the Perpetual Inventory Method

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming an Average Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 8.25 1,650   2,450
(800+1,650)/(100+200)
2,450/300 = $8.166
300 @ $8.166
Jan 20, xxxx   100 200     816.60
100 @ $8.166
1,633.40
200 @ $8.166
Mar 5, xxxx 300   500 8.50 2,550   4,183.40
(1,633.40+2,550)/(200+300)
4,183.40/500 = $8.367
500 @ $8.367
Mar 30, xxxx   200 300     1,673.40
200 @ $8.367
2,510
300 @ $8.367
Jun 5, xxxx   150 150     1,255.05
150 @ $8.367
1,254.95
150 @ $8.367
Jun 30, xxxx   70 80     585.69
70 @ $8.367
669.26
80 @ $8.367
Sep 10, xxxx 200   280 8.75 1,750   2,419.26
(669.26+1,750)/(80+200)
2,419.26/280 = $8.64
280 @ $8.64
Oct 20, xxxx   100 180     864
100 @ $8.64
1,555.26
180 @ $8.64
Dec 15, xxxx   90 90     777.60
90 @ $8.64
777.66
90 @ $8.64
Dec 20, xxxx 150   240 9.00 1,350   2,127.66
(777.66+1,350)/(90+150)
2,127.66/240 = $8.865
240 @ $8.865
Dec 31, xxxx   140 100     1,241.10
140 @ $8.865
886.56
100 @ $8.865
Totals 850 850     7,300 7,213.44
 

(1) Our first entry on our Stock Ledger Card is our beginning inventory which is 800 units at a cost of $8.00 each resulting in a beginning value of $800. These units and costs were carried over from our prior year ending balances.

(2) Our second entry is our Jan 15, xxxx purchase of 200 units at a unit cost of $8.25. With the average cost method we pool layers so we always only have one cost layer that makes up our total inventory value. We combined the costs and units in our beginning inventory with our current purchase cost and units to arrive at our current inventory value of $2,450 and our moving average cost of $8.166.

(3) Our third entry is our Jan 20, xxxx sale of 100 units. Since we are using the Average Cost Flow Method (moving average), the 100 units sold and the remaining 200 units on hand are both valued at the $8.166 moving average unit cost. The 100 units sold are assigned a cost of 100 @ $8.166 or a total amount of $816.66 and the remaining 200 units on hand are assigned a value $1,633.40 (200 @ $8.1666).

The remaining purchase and sales transactions included in our Stock Record Card follow the same logic. When purchases are made units and dollars are pooled to arrive at a new moving average cost.

The yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

Did you notice that a new average cost was calculated each time we received (purchased) items ? Isn't that exactly what I said earlier ? These are the only times a new moving average needs to be calculated.

The moving average was calculated by:

  • Adding the total cost of the inventory prior to the purchase to the cost of the purchased goods.
  • Likewise, the quantity (number of units) in inventory prior to the purchase was added to the quantity purchased.
  • The Moving Average was calculated simply by dividing the total cost of the current inventory by the current quantity.

This average cost is used as the cost to assign cost to items sold until another purchase is made. Once a new purchase is made, a new average cost is calculated and used to assign cost to items sold (Cost Of Goods Sold). This process is repeated throughout the year (period) whenever a new purchase is made.

Weighted Average with the Periodic System

As required with the Periodic Inventory Method we first perform a physical count of the goods on hand. After counting our Super Widgets, we recorded 100 units on our count sheet.

Now that we have the quantity, we need to assign costs to the cost of the units sold (Cost Of Goods Sold) and our remaining units on hand (Ending Inventory).

the calculation of our weighted average cost to use to assign costs to our ending inventory and cost of goods sold is simple. Simple that is, if we maintained some kind of detailed purchase record during the year. What about the amounts we that we recorded in our Special Purchases General Ledger Account during the year ? Doesn't that let us off the hook ? The dollars recorded give us the total dollar amount of our purchases for all our product purchases. We need the dollar amount purchased for each and every one of our products. We also need the quantities (units) that were purchased for each and everyone of our products.

Thank goodness our accountant that Bean Counter guy told us about the benefit of maintain a Purchasing Schedule even if we use the Periodic Inventory Method !

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Using the data from our Schedule, the calculation of the cost used to assign cost to our Ending Inventory and our Cost of Goods Sold is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800 100
Purchases $7,300 850
Total Cost and Units To Account For $8,100 950

Calculation of weighted Average Cost:
Weighted Average Cost Per Unit = Total Costs To Account For / Total Units To Account For
Weighted Average Cost Per Unit = $8,100 / 950
Weighted Average Cost Per Unit = $8.526

Cost Assigned To Ending Inventory:
Cost Assigned To Ending Inventory = Units On Hand x Weighted Average Cost Per Unit
Cost Assigned To Ending Inventory = 100 x $8.526
Cost Assigned To Ending Inventory = $852.60

What about the cost assigned to Cost Of Goods Sold ? As Sherlock Holmes (the mystery book detective) often said to his sidekick Dr. Watson -"that's elementary Watson".

Cost Of Goods Sold Calculation:

Total Dollars To Account For $8,100.00
Less: Costs Assigned To Ending Inventory 852.60
Costs Assigned To Cost Of Goods Sold $7,247.40

Comparisons

Comparison of the Results Obtained by Different Costing Methods-Assuming Rising Prices

Method Ending Inventory Cost Of Goods Sold Total Costs Accounted For
FIFO-Perpetual $900.00 $7,200.00 $8,100.00
FIFO-Periodic $900.00 $7,200.00 $8,100.00
LIFO-Perpetual $817.50 $7,282.50 $8,100.00
LIFO-Periodic $800.00 $7,300.00 $8,100.00
Average-Perpetual $866.56 $7,213.44 $8,100.00
Average-Periodic $852.60 $7,247.40 $8,100.00

Did you notice that the FIFO method used with either the Periodic or Perpetual Inventory method produced the same results for the Cost Of Goods Sold and the Ending Inventory ?

Comparison of Different Inventory Methods-Assuming Rising Prices

Effect On Lowest Amount Middle Amount Highest Amount
Ending Inventory LIFO Average FIFO
Cost Of Goods Sold FIFO Average LIFO
Profits LIFO Average FIFO

During periods of rising prices, the LIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits. Since income taxes are based on profits, this is one of the reasons why the method is often used because the amount a business has to pay for income taxes will be less. The FIFO Costing Method produced the highest Ending Inventory Value. The Average Costing Method results fell between (in the middle) of the LIFO and FIFO results.

Decreasing Prices

Earlier, we took a look at the effects of rising prices on our Inventory Calculations, now it's time to take a look at the effect of decreasing prices.

You should now be somewhat familiar with the calculations and computations used with the different costing and inventory methods. Whether prices are increasing, declining, or fairly steady the calculations and computations used are the same. Price fluctuations do; however, affect the results that the different costing methods produce.

The following information about our product Super Widget will be used to illustrate the record keeping and calculations involved using the Periodic and Perpetual Inventory Methods and the different Costing Methods (Cost Flow Assumptions).

  • Sales of Super Widgets made during the year at a constant selling price of $15.00 throughout the year are as follows:
Date Quantity Sold Sales Amount
January 20, xxxx 100 1,500
March 30, xxxx 200 3,000
June 5, xxxx 150 2,250
June 30, xxxx 70 1,050
October 20, xxxx 100 1,500
December 15, xxxx 90 1,350
December 31, xxxx 140 2,100
   
Total Sales 850 12,750

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $7.50 1,500 A-976123 Acme Products
March 5, xxxx 300 $7.25 2,175 7898000 Alternate Products
September 10, xxxx 200 $7.00 1,400 A-999999 Acme Products
December 20, xxxx 150 $6.75 1,012.50 B-789012 Acme Products
       
Total Purchases 850   6,087.50

Notice that the cost per unit of purchasing our Super Widgets decreases from $7.50 to $6.75 during the period.

FIFO - First-in First-out

FIFO with the Perpetual Inventory Method

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming a FIFO Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 7.50 1,500   2,300
100 @ $8.00
200 @ $7.50
Jan 20, xxxx   100 200     800
100 @ $8.00
1,500
200 @ $7.50
Mar 5, xxxx 300   500 7.25 2,175   3,675
200 @ $7.50
300 @ $7.25
Mar 30, xxxx   200 300     1,500
200 @ $7.50
2,175
300 @ $7.25
Jun 5, xxxx   150 150     1,087.50
150 @ $7.25
1,087.50
150 @ $7.25
Jun 30, xxxx   70 80     507.50
70 @$7.25
580
80 @ $7.25
Sep 10, xxxx 200   280 7.00 1,400   1,980
80 @ $7.25
200 @ $7.00
Oct 20, xxxx   100 180     720
80 @ $7.25
20 @ $7.00
1,260
180 @ $7.00
Dec 15, xxxx   90 90     630
90 @ $7.00
630
90 @ $7.00
Dec 20, xxxx 150   240 6.75 1,012.50   1,642.50
90 @ $7.00
150 @ $6.75
Dec 31, xxxx   140 100     967.50
90 @ $7.00
50 @ $6.75
675
100 @ $6.75
Totals 850 850     6,087.50 6,212.50
 

You know by now that the yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

FIFO with the Periodic Method
I'm getting a little lazy. We should know by now that we get the same results for the costs assigned to our Ending Inventory and Cost Of Goods Sold whether we use FIFO with the Perpetual or Periodic Method.

Our costs are assigned as follows:

Ending Inventory Cost Of Goods Sold Total Costs Accounted For
$675.00 $6,212.50 $6,887.50

Don't believe me, huh ! I know, I'll prove it. Let's take a look at our Schedule Of Beginning Inventory and Purchases.

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $7.50 1,500 A-976123 Acme Products
March 5, xxxx 300 $7.25 2,175 7898000 Alternate Products
September 10, xxxx 200 $7.00 1,400 A-999999 Acme Products
December 20, xxxx 150 $6.75 1,012.50 B-789012 Acme Products
       
Total Purchases 850   6,087.50

Remember with FIFO we work backward starting with our newest (last) unit purchase cost. From our schedule or search and analysis of invoices, our newest invoice is from our supplier Acme Products, dated December 20, xxxx, Invoice Number B-789012, for 150 units at a unit cost of $6.75. Since we only have 100 units remaining in our ending inventory, we lucked out.

All our Super Widgets will be assigned a unit cost of $6.75 using the unit cost from Invoice Number B-789012 dated December 20, xxxx resulting in an Ending Inventory Value of $675.00 (100 units @ $6.75).

Using the data from our Schedule, the calculation of the cost assigned to our units sold (Cost Of Goods Sold) is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800.00 100
Purchases $6,087.50 850
Total Cost and Units To Account For $6,887.50 950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
Total Dollars and Units To Account For $6,887.50 950
Less: Costs and Units Assigned To Ending Inventory 675.00 100
Costs and Units Assigned To Cost Of Goods Sold $6,212.50 850

LIFO-Last-in First-out

LIFO with the Perpetual Inventory Method

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming a LIFO Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 7.50 1,500   2,300
100 @ $8.00
200 @ $7.50
Jan 20, xxxx   100 200     750
100 @ $7.50
1,550
100 @ $8.00
100 @ $7.50
Mar 5, xxxx 300   500 7.25 2,175   3,725
100 @ $8.50
100 @ $7.50
300 @ $7.25
Mar 30, xxxx   200 300     1,450
200 @ $7.25
2,275
100 @ $8.00
100 @ $7.50
100 @ 7.25
Jun 5, xxxx   150 150     1,100
100 @ $7.25
50 @ $7.50
1,175
100 @ $8.00
50 @ $7.50
Jun 30, xxxx   70 80     535
50 @ $7.50
20 @ $8.00
640
80 @ $8.00
Sep 10, xxxx 200   280 7.00 1,400   2,040
80 @ $8.00
200 @ $7.00
Oct 20, xxxx   100 180     700
100 @ $7.00
1,340
80 @ $8.00
100 @ $7.00
Dec 15, xxxx   90 90     630
90 @ $7.00
710
80 @ $8.00
10 @ $7.00
Dec 20, xxxx 150   240 6.75 1,012.50   1,722.50
80 @ $8.00
10 @ $7.00
150 @ $6.75
Dec 31, xxxx   140 100     945
140 @ $6.75
777.50
80 @ $8.00
10 @ $7.00
10 @ $6.75
Totals 850 850     6,087.50 6,110.00
 

Yes, those yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

LIFO with the Periodic Method

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $7.50 1,500 A-976123 Acme Products
March 5, xxxx 300 $7.25 2,175 7898000 Alternate Products
September 10, xxxx 200 $7.00 1,400 A-999999 Acme Products
December 20, xxxx 150 $6.75 1,012.50 B-789012 Acme Products
       
Total Purchases 850   6,087.50

Working forward (from the oldest to the newest) from our schedule or search and analysis of our beginning inventory and invoices, our first oldest or earliest purchase is represented by our Beginning Inventory. By chance, the beginning balance is made up of 100 units with a unit cost of $8.00.

We lucked out. Since we only need to find the unit cost for 100 units from our count and that make up our Ending Inventory, the Beginning Inventory unit cost of $8.00 per unit is the only unit cost we need to assign cost to our units on hand and remaining in Inventory.

All our Super Widgets (100 in inventory) are assigned a unit cost of $8.00 resulting in an Ending Inventory Value of $800.00 (100 units @ $8.00).

Using the data from our Schedule, the calculation of the cost assigned to our units sold (Cost Of Goods Sold) is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800.00 100
Purchases $6,087.50 850
Total Cost and Units To Account For $6,887.50 950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

  Dollars Units
Total Dollars and Units To Account For $6,887.50 950
Less: Costs and Units Assigned To Ending Inventory 800.00 100
Costs and Units Assigned To Cost Of Goods Sold $6,087.50 850

Average Costing

Moving Average with the Perpetual Inventory Method

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $8.25 1,650 A-976123 Acme Products
March 5, xxxx 300 $8.50 2,550 7898000 Alternate Products
September 10, xxxx 200 $8.75 1,750 A-999999 Acme Products
December 20, xxxx 150 $9.00 1,350 B-789012 Acme Products
       
Total Purchases 850   7,300

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming an Average Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Widgets Product Number:SW-1
Inventory Level: Maximum:500 Minimum:50
Department:Accessories Reorder Time: 5 days
Main Supplier:Acme Products
Date Received Sold Balance Unit Cost Received Sold Balance
Jan 1, xxxx
Beginning Inventory
    100 $8.00     800
100 @ $8.00
Jan 15, xxxx 200   300 7.50 1,500   2,300
300 @ $7.666
Jan 20, xxxx   100 200     766.60
100 @ $7.666
1,533.40
200 @ $7.666
Mar 5, xxxx 300   500 7.25 2,175   3,708.40
500 @ $7.416
Mar 30, xxxx   200 300     1,483.20
200 @ $7.416
2,225.20
300 @ $7.416
Jun 5, xxxx   150 150     1,112.40
150 @ $7.416
1,112.80
150 @ $7.416
Jun 30, xxxx   70 80     519.12
70 @ $7.416
593.68
80 @ $7.416
Sep 10, xxxx 200   280 7.00 1,400   1993.68
280 @ $7.12
Oct 20, xxxx   100 180     712
100 @ $7.12
1,281.68
180 @ $7.12
Dec 15, xxxx   90 90     640.80
90 @ $7.12
640.88
90 @ $7.12
Dec 20, xxxx 150   240 6.75 1,012.50   1,653.38
240 @ $6.889
Dec 31, xxxx   140 100     964.46
140 @ $6.889
688.92
100 @ $6.8892
Totals 850 850     6,087.50 6,197.58
 

Yes those yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

Weighted Average with the Periodic System

Our Schedule of Purchases and Beginning Inventory

  • Beginning Inventory is made up of 100 units with a cost per unit of $8.00 for a total cost assigned of $800.00.
  • Purchases of Super Widget made during the year are as follows:
Date Quantity Unit Cost Extended Cost Invoice Number Supplier
January 15, xxxx 200 $7.50 1,500 A-976123 Acme Products
March 5, xxxx 300 $7.25 2,175 7898000 Alternate Products
September 10, xxxx 200 $7.00 1,400 A-999999 Acme Products
December 20, xxxx 150 $6.75 1,012.50 B-789012 Acme Products
       
Total Purchases 850   6,087.50

Using the data from our Schedule, the calculation of the cost used to assign cost to our Ending Inventory and our Cost of Goods Sold is straight forward.

  Purchased Dollars Purchased Units
Beginning Inventory $800.00 100
Purchases $6,087.50 850
Total Cost and Units To Account For $6,087.50 950

Calculation of weighted Average Cost:
Weighted Average Cost Per Unit = Total Costs To Account For / Total Units To Account For
Weighted Average Cost Per Unit = $6,887.50 / 950
Weighted Average Cost Per Unit = $7.25

Cost Assigned To Ending Inventory:
Cost Assigned To Ending Inventory = Units On Hand x Weighted Average Cost Per Unit
Cost Assigned To Ending Inventory = 100 x $7.25
Cost Assigned To Ending Inventory = $725.00

What about the cost assigned to Cost Of Goods Sold ?

Cost Of Goods Sold Calculation:

Total Dollars To Account For $6,887.50
Less: Costs Assigned To Ending Inventory 725.00
Costs Assigned To Cost Of Goods Sold $6,162.50

Comparisons

Comparison of the Results Obtained by Different Costing Methods-Assuming Decreasing Prices

Method Ending Inventory Cost Of Goods Sold Total Costs Accounted For
FIFO-Perpetual $675.00 $6,212.50 $6,887.50
FIFO-Periodic $675.00 $6,212.50 $6,887.50
LIFO-Perpetual $777.50 $6,110.00 $6,887.50
LIFO-Periodic $800.00 $6,087.50 $6,887.50
Average-Perpetual $688.92 $6,197.58 $6,887.50
Average-Periodic $725.00 $6,162.50 $6,887.50

Again, did you notice that the FIFO method used with either the Periodic or Perpetual Inventory method produced the same results for the Cost Of Goods Sold and the Ending Inventory ? This is always the case when the FIFO method of costing is used to assign costs.

Comparison of Different Inventory Methods-Assuming Decreasing Prices

Effect On Lowest Amount Middle Amount Highest Amount
Ending Inventory FIFO Average LIFO
Cost Of Goods Sold LIFO Average FIFO
Profits FIFO Average LIFO

During periods of falling or declining prices, the FIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits. The LIFO Costing results in the highest Ending Inventory Value thus resulting in the highest reported reports. The Average Costing Method amount fall in the middle in between the FIFO and LIFO results.

Let's combine our results into one table using our above table assuming decreasing or falling prices and our earlier table that assumed increasing prices.

Comparison Of Effects Of Rising and Falling Prices
Based On Cost Flow Method Used

Prices Rising Falling Rising Falling Rising Falling
Results Produced Lowest Amount Middle Amount Highest Amount
Effect On
Ending Inventory LIFO FIFO Average Average FIFO LIFO
Cost Of Goods Sold FIFO LIFO Average Average LIFO FIFO
Profits LIFO FIFO Average Average FIFO LIFO

During periods of rising prices, the LIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits. Since income taxes are based on profits, this is one of the reasons why the method is often used because the amount a business has to pay for income taxes will be less.

During periods of falling or declining prices, the FIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits.

The average costing method always produces results in the middle whether prices are increasing or declining.

Specific Identification Costing Method

I saved the discussion and example calculations for the specific identification method to last because the logic behind the method is obvious. The actual cost of the item sold or on hand is the cost used to assign cost to Cost Of Goods Sold and Ending Inventory.

In order to be able to use this method we have to be able to identify the actual unit sold or on hand and the actual cost of the unit. In our example, even though the mowers look alike, we are going to use serial numbers to identify each unit.

Our example assumes that we are in the Home and Garden Business. We use the Specific Identification Method for costing our high dollar Super Grasser Lawn Mowers and the FIFO method for costing our parts.

Inventory, Sales, and Purchasing Information For The Year

  • We had no units of Super Grasser Mowers on hand at the beginning of our year. In other words, we had no Beginning Inventory.
  • Sales and Purchases of Super Grasser Mowers made during the year are as follows:

Purchases made during the year from our supplier Big Time Mowers are as follows:
Note:Purchase unit costs varied during the year due to various incentives offered by our suppler.

Date Serial Number Cost Invoice Number
Jan 15, xxxx 156875 2,100 743
March 15, xxxx 157904 2,050 1050
March 15, xxxx 157905 2,050 1050
April 5, xxxx 160500 2,150 1500
June 10, xxxx 160750 2,000 2250
July 20, xxxx 170111 1,900 2500
Totals 6 Units 12,250  

Sales made during the year (suggested List Price $2,350) to our customers are as follows:

Date Serial Number Cost Sales Price
April 1, xxxx 157904 2,050 2,350
April 25, xxxx 156875 2,100 2,350
May 10, xxxx 160500 2,150 2,350
June 20, xxxx 160750 2,000 2,200
Totals 4 Units 8,300 9,250

Specific Identification with the Perpetual Inventory Method

Our Stock Record Card (Subsidiary Ledger Card) for Super Widgets assuming the Specific Identification Cost Flow appears below:

Inventory Stock Record Card (Subsidiary Ledger Card)
Product Description:Super Grasser Mowers Product Number:SGM-1
Inventory Level: Maximum:20 Minimum:5
Department:Lawn & Garden Reorder Time: 5 days
Main Supplier:Super Grasser Industries
Date Received Serial No. Sold Balance Purchase Cost Sold Balance Serial No.
and Unit Cost
January 1, xxxx       0     0  
January 15, xxxx 1 156875   1 2,100   2,100 156875-2,100
March 15, xxxx 1 157904   2 2,050   4,150 156875-2,100
157904-2,050
  1 157905   3 2,050   6,200 156875-2,100
157904-2,050
157905-2,050
April 1, xxxx   157904. 1 2   2,050 4,150 156875-2,100
157905-2,050
April 15 1, xxxx 1 160500   3 2,150   6,300 156875-2,100
157905-2,050
160500-2,150
April 25, xxxx   156875 1 2   2,100 4,200 157905-2,050
160500-2,150
May 10, xxxx   160500 1 1   2,150 2,050 157905-2,050
June 10, xxxx 1 160750   2 2,000   4,050 157905-2,050
160750-2,000
June 20, xxxx   160750 1 1   2,000 2,050 157905-2,050
July 20, xxxx 1 170111   2 1,900   3,950 157905-2,050
170111-1,900
Totals 6   4 2 12,250 8,300    

Notice that we used serial numbers in order to be able to identify each mower and treat it as unique. Each new purchase was assigned a serial number(s) and each mower sold was identified by it's serial number. The cost assigned to the goods sold is the actual cost of the specific mower sold and the mowers remaining on hand are each valued at their actual cost.

Of course the yellow highlighted balances represent our Cost Of Goods Sold and Ending Inventory amounts at the end of our period.

Specific Identification with Periodic Inventory Method

  Purchased Dollars Purchased Units
Beginning Inventory $0 0
Purchases $12,250 6
Total Cost and Units To Account For $12,250 6

Costs Assigned to Ending Inventory

Per physical count of our remaining mowers we determine that we have two (2) unsold mowers at the end of year as follows:

Serial Number Unit Cost
157905 2,050
170111 1,900
Total Cost Assigned To Ending Inventory 3,950

Costs Assigned to Cost Of Goods Sold

Cost Of Goods Sold Calculation:

Total Dollars To Account For $12,250
Less: Costs Assigned To Ending Inventory 3,950
Costs Assigned To Cost Of Goods Sold $8,300

Did you notice that the cost assigned to Cost Of Goods Sold and Ending Inventory are the same whether a Periodic or Perpetual Method was used for calculating the costs ? What other method is this also true for ? FIFO !

If the FIFO or Specific Identification Costing Method is used, the costs assigned to Cost of Goods Sold and Ending Inventory are the same whether the Periodic or Perpetual Inventory Method is used to calculate costs.

Observation: In our example, we purchased the same mower at different unit costs during the year. Since all the units are the same, we could have "manipulated" are profit somewhat based on what mower (serial number) we selected to sell from those we had on hand at the time of the sale. Normally, dealers would choose the oldest model to sell because of floor plan (credit granted dealers by supplier) interest requirements. Interest is normally charged by the supplier to the dealer after they have had the item for a certain period of time.

Recap Of The Costing Methods

Specific Identification
Description Cost Of Goods Sold is the actual cost of the items sold and Ending Inventory is the actual cost of the items on hand.
Reasoning/Logic Reflects what actually occurred during the year.
Ending Inventory Value Reflects the actual cost of the items on hand at the end of the year.
Cost Of Goods Sold Value Reflects the actual cost of the items sold during the year.
Average Cost
Description Pools all items and uses the same average cost to assign costs to Ending Inventory and Cost Of Goods Sold.
Reasoning/Logic Considers all the items to have the same average characteristics.
Ending Inventory Value Reflects the average cost of the items on hand at the end of the year.
Cost Of Goods Sold Value Reflects the average cost of the items sold during the year. the year.
FIFO- First-in First-out
Description Cost of the earliest units purchased are assigned to the cost of the items sold (Cost Of Goods Sold ). Ending Inventory (units on hand) contain the cost of the newest (last) units purchased.
Reasoning/Logic Approximates what actually occurred during the year.
Ending Inventory Value Reflects the newest (last) unit purchase costs.
Cost Of Goods Sold Value Reflects the unit costs of the earliest (oldest) items purchased as the cost of the units sold during the year.
LIFO- Last-in First-out
Description Cost of newest (last) units purchased are assigned to the cost of the units sold (Cost Of goods Sold). Ending Inventory (units on hand) contain the cost of the oldest units purchased.
Reasoning/Logic Provides an indicator of future profitability by assigning the newest (last) costs to the units sold (Cost Of Goods Sold). Matches current (most recent costs) with revenues. Also, based on tax savings that occur during periods of rising prices.
Ending Inventory Value Reflects the oldest unit purchase costs.
Cost Of Goods Sold Value Reflects the unit costs of the newest (most recent) items purchased as the cost of the units sold during the year.

Effects On Financial Statements

As you've seen, the choice of a costing and inventory method normally produces different amounts for cost of goods sold and ending inventory. The one exception is that FIFO used with the Periodic Method and FIFO used with the Perpetual Method produce the same results. All the costing methods (FIFO, LIFO, and Average); however, do produce different amounts for ending inventory and cost of goods sold.

Let's use our Super Widget example assuming rising prices that we discussed earlier in this lesson. The only additional assumption that we'll make is that our operating expenses totalled $1,000 for the year.

Our Profit and Loss Statements Using the different Costing and Inventory Methods are as follows:

Methods FIFO Perpetual FIFO Periodic LIFO Perpetual LIFO Periodic Average Perpetual Average Periodic
Sales $12,750 $12,750 $12,750 $12,750 $12,750 $12,750
Cost Of Goods Sold 7,200 7,200 7,282.50 7,300 7,213.44 7,247.40
Gross Profit $5,550 $5,550 $5,467.50 $5,450 $5,536.56 $5,502.60
Operating Expenses 1,000 1,000 1,000 1,000 1,000 1,000
Net Profit $4,550 $4,550 $4,467.50 $4,450 $4,436.56 $4,502.60

Our profits range from a low of $4,450 obtained from using the LIFO method to a high of $4,550 obtained by using the FIFO method.

Our Balance Sheet would contain the following amounts:

Methods FIFO Perpetual FIFO Periodic LIFO Perpetual LIFO Periodic Average Perpetual Average Periodic
Merchandise Inventory $900 $900 $867.50 $800 $886.56 $852.60

Our Balance Sheet Inventory amounts range from a low of $800 obtained by using the LIFO method to a high of $900 obtained by using the FIFO method.

Observation:Two businesses with exactly the same transactions can appear drastically different based only on the inventory costing method that they use.

You should know the routine by now. Yep ! Just a little quiz to check you out.
Quiz-Costing Methods
Having completed this lesson, you deserve more than a soda or cup of coffee. If you need to, go ahead and grab your remote and take a break and let this lesson sink in. As I said earlier, we're not in any hurry. I sure don't want to be accused of causing you mental exhaustion. Once again, we need to see if we picked up any useful information from this lesson.
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