BAT 4M0 Inventory Cost Determination Methods PDF

## BAT 4M0 6.2 - Inventory Cost Determination Methods ### Objective: - Calculate cost of goods sold and ending inventory in a perpetual inventory system using: - Specific identification - FIFO - Average methods of cost determination ### Specific Identification - Tracks the actual phy...

## BAT 4M0 6.2 - Inventory Cost Determination Methods ### Objective: - Calculate cost of goods sold and ending inventory in a perpetual inventory system using: - Specific identification - FIFO - Average methods of cost determination ### Specific Identification - Tracks the actual physical flow of the goods. - Each item of inventory is marked, tagged, or coded with its specific unit cost. - Most frequently used when the company sells a limited variety of high unit-cost items. - Must be used for inventory items that are not interchangeable. - Examples: - Jewelry store selling one-of-a-kind rings - Customized products such as furniture, artistic work, car manufacturers, and car dealerships ### Illustration 6.2 Specific Identification | Price | Price | Price | |---|---|---| | $5,400 | $3,600 | $7,000 | **Given above example:** - Total inventory = $9,200 - COGS (once sold) = $6,200 - Merchandise inventory (ending inventory) = $3,000 **Using Assumed Cost Flow Methods** - Other cost flow methods are allowed since specific identification is often impractical. - These methods are known as "cost flow assumptions" because they assume a flow of costs that may be unrelated to the physical flow of goods. - **Cost Flow Assumptions:** - First-in, first-out (FIFO) - Last-in, first-out (LIFO) - Average cost **1. FIFO** - Assumes that the earliest goods purchased are the first to be sold. - Often reflects the actual physical flow of merchandise. - Under FIFO, the costs of the earliest goods purchased recognized as the cost of goods sold. **2. LIFO** - Assumes that the latest goods purchased are the first to be sold and that the earliest goods purchased remain in ending inventory. - Rarely used in Canada. - LIFO method assumes latest goods purchased are the first to be sold. **3. Average Cost** - Assumes that the goods available for sale are homogeneous or non-distinguishable. - The allocation of the cost of goods available for sale is made on the basis of the weighted average unit cost incurred. - The weighted average unit cost is then applied to the units sold to determine the cost of goods sold and to the units on hand to determine the ending inventory. - Good to know: The weighted average cost per unit is a moving average that almost always changes when the company purchases more units. It never changes when the company sells units. **Allocation of the cost of goods available for sale in average cost method is made on the basis of the weighted average unit cost which is calculated as follows:** - Cost of Goods Available for Sale / Total Units Available for Sale = Weighted Average Unit Cost ### FIFO Perpetual Inventory Schedule | Date | Purchases | Total Units | Total Cost | Cost of Goods Sold | Balance | |---|---|---|---|---|---| | Apr 15 | 200 | $2,200 | 100 | $1,000 | 100 | | | | | 100 | $1,000 | 200 | | May 1 | | | 50 | $550 | 150 | | | | 150 | $1,650 | 150 | | Aug 24 | 300 | $3,600 | 280 | $3,400 | 300 | | Sept 1 | | | 50 | $600 | 250 | | Nov. 27 | 400 | $5,200 | 50 | $600 | 400 | Important to check that beginning inventory + purchases - cost of goods sold = ending inventory **Average Cost Perpetual Inventory Schedule** | Date | Purchases | Total Units | Total Cost | Cost of Goods Sold | Balance | |---|---|---|---|---|---| | Jun 1 | 100 | $1,000 | 100 | $1,000 | 100 | | Apr 15 | 200 | $2,200 | 300 | $10.67 | $3,200 | | May 1 | 150 | $1,600 | 150 | $10.67 | $1,600 | | Aug 24 | 300 | $3,600 | 450 | $11.86 | $5,200 | | Sept 1 | 400 | $4,622.22 | 50 | $11.86 | $5,200 | | Nov. 27 | 400 | $5,200 | 450 | $12.89 | $5,777.78 | Important to check that beginning inventory + purchases - cost of goods sold = ending inventory. **Also can complete the same check using instead of total dollar values.** - Units check: beginning inventory + purchases - cost of goods sold = ending inventory ### 6.2 Activities: | | Questions | Brief Exercises | Exercises | Problems | |---|---|---|---|---| | Part A: | pg 290 # 5, 7 | pg 291 # 3, 4, 5 | n/a | n/a | | Part B: | n/a | pg 291 # 6, 7, 8 | pg 293 # 3, 4, 5 | n/a |