Accounting 3

Chapter 22

Section 2

Determining the Cost of Merchandise Inventory Costs are not recorded on inventory records at

the time a periodic inventory is taken. After the quantities of merchandise on hand are

counted, purchase invoices are used to find merchandise unit prices and are then recorded on the inventory records.

The total costs are then calculated using the quantities and unit prices recorded on the inventory records.

Most businesses use one of three inventory costing methods: first-in-first-out; last-in-first-out; or weighted-average.

First-In-First Out Inventory Costing (FIFO)

FIFO is when you use the price of (remaining) merchandise purchased first to calculate the cost of merchandise sold first.

For example, on December 31 Winning Edge had 27 tennis rackets on hand. Nine of those rackets (purchased August 25) cost $27 each. Eighteen of those rackets (purchased Nov. 4) cost $28 each.

In order to figure the ending cost of inventory, we take 9 rackets at $27 (total of $243.00) and 18 rackets at $28 (total of $504.00) to end up with an ending cost of inventory of $747.00.

*Look at p. 578 in your textbook for a chart of where this information is coming from.

Last-In-First-Out Inventory Costing (LIFO)

LIFO is when you use the price of merchandise purchased last to calculate the cost of merchandise sold first.

Using the same example: December 31 WE had 27 rackets on hand. To find ending cost of inventory: take 17 rackets at $23 each ($391) + 8 rackets at $25 each ($200) + 2 rackets at $26 each ($52) = $643.00 ending inventory cost.

*Look at p. 579 in your textbook for a chart of where this information comes from.

Weighted-Average Inventory Costing

This is when you use the average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold.

First, you add all total costs and divide it by the total number of units purchased. Then, take the average unit price and multiply it by the number of units left on hand.

This is the ending inventory cost.

Tips for calculating FIFO and LIFO

Based on the book, this may be confusing.My tips for you are:

FIFO- Go from the bottom to the top of the chart until you have all units on hand accounted for.

LIFO- Go from the top to the bottom of the chart until you have all units on hand accounted for.

I know this may not make sense, but go with it.

Calculating Cost of Merchandise Sold

Cost of Merchandise Available for Sale – Ending Cost of Inventory = Cost of Merchandise Sold.

Even though the formula stays the same no matter which method of inventory costing you use, the answer will not be the same.

Work Together p. 582next three slides, Assignment on last slide

Purchase Dates Units Purchased Unit Price Total Cost FIFO Units on Hand FIFO Cost

Totals

Jan 1, Beg. Inv. 14 $30.00 $420.00

Mar 3, purchases 9 32.00 288.00

Jul 13, purchases 10 34.00 340.00

Aug 15, purchases 8 36.00 288.00

Oct 22, purchases 9 38.00 342.00

16

9 342.00

7 252.00

594.0050 $1,678.00

Purchase Dates Units Purchased Unit Price Total Cost LIFO Units on Hand LIFO Cost

Totals

Jan 1, Beg. Inv. 14 $30.00 $420.00

Mar 3, purchases 9 32.00 288.00

Jul 13, purchases 10 34.00 340.00

Aug 15, purchases 8 36.00 288.00

Oct 22, purchases 9 38.00 342.00

50 $1,678.00 16

14 $420.00

2 64.00

$484.00

Purchases Total Date Units Unit Price Cost

Totals

Weighted Average

Jan 1, Beg. Inv. 14 $30.00 $420.00

Mar 3, Purch. 9 32.00 288.00

Jul 13, Purch. 10 34.00 340.00

Aug 15, Purch. 8 36.00 288.00

Oct 22, Purch. 9 38.00 342.00

50 1,678.00

(TC)1,678.00 / (#U) 50 = (WA/U) $33.56

(UOH) 16 x (WA/U) 33.56 = $536.96 ending inventory cost

Assignment

Do Application 22-2 by hand.Turn it into Mrs. Middleton.Move on to Section 3.