Weighted-Average Cost and FIFO Inventory Method Quiz

Inventory Costing Methods

• In the weighted-average cost method, it is assumed that the materials in stock are homogeneous and interchangeable.

FIFO (First-In-First-Out) Method

• Inventory items are issued at the earliest purchase price.
• In the example, 200 units were in the closing inventory under FIFO.

Inventory Costs

• The total cost of purchases on May 4th was $2,000.
• The average unit cost of sales is $10.
• The cost of goods sold (COGS) on May 26th was $1,500.
• The closing inventory on May 31st was $2,500.

Inventory Systems

• A Periodic Inventory System is characterized by periodic updating of inventory records.
• In a Periodic Inventory System, the cost of goods sold is deducted from the cost of goods available for sale to determine profit in an accounting period.
• Inventory is shown as a current asset in the Balance Sheet.

Perpetual Inventory System

• This system involves maintaining detailed inventory records on a transaction-by-transaction basis.
• The closing stock is calculated using the formula: Closing Stock = Opening Stock + Purchases - Sales.

Inventory Costing Methods

• The two commonly used methods for assigning historical costs to inventory and goods sold are FIFO (First-In-First-Out) and weighted-average cost method.
• The FIFO method is characterized by the assumption that the earliest inventory is sold first.

Purpose of Inventory

• The main purpose of inventory in a business is to facilitate sales and production.

Cost of Goods Sold (COGS)

• The Cost of Goods Sold (COGS) includes the cost of inventory sold during an accounting period.

Inventory Terms

• 'Opening Inventory' refers to the inventory at the beginning of an accounting period.
• 'Closing Stock' represents the inventory at the end of an accounting period.
• 'Raw Materials' inventory includes goods that are yet to be introduced into the production process.
• 'Work-in-Progress' inventory consists of goods that are partially completed but not yet ready for sale.

Net Realisable Value (NRV)

• Net Realisable Value (NRV) represents the estimated selling price of an inventory item minus the estimated cost of completing and selling the item.
• The formula NRV = SALES PRICE - INVENTORY COMPLETION COST represents the calculation of net realisable value.
• In the example, the item with the highest net realisable value (NRV) is Item A.
• The purpose of calculating net realisable value (NRV) for inventory is to determine the value of inventory at the end of an accounting period.
• If an item's NRV is lower than its sales price, it indicates that the item is overvalued and may need to be written down.

Test your knowledge on Weighted-Average Cost (WAC) and the First-In, First-Out (FIFO) inventory method, which assumes that materials received first are the first to be issued. This quiz includes examples of FIFO calculations based on purchase and sales transactions.