century 21 accounting © thomson/south-western lesson 6-2 inventory costing

CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 6-2LESSON 6-2

Inventory Costing


FIRST-IN, FIRST-OUT INVENTORY FIRST-IN, FIRST-OUT INVENTORY COSTING METHODCOSTING METHOD

Using the price of merchandise purchased first to calculate the cost of merchandise sold first is called the first-in, first-out inventory costing method FIFO is an abbreviation for first-in, first-out

Assumes that the merchandise purchased first (first in) is the merchandise sold first (first out)

Uses the most recent purchase prices to determine the cost of merchandise inventory remaining

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1. Assign units from most recent purchase.

2. Assign units from next most recent purchase.

3. Multiply ending inventory units by unit price.

4. Total the ending inventory columns.

FIRST-IN, FIRST-OUT FIRST-IN, FIRST-OUT INVENTORY COSTING METHODINVENTORY COSTING METHOD page 176

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• OfficeMart has an inventory of 700 three-ring binders on November 30. • The remaining 300 units from the June purchase & the 500 units in the beginning

inventory are designated as the units that were sold.


LAST-IN, FIRST-OUT INVENTORY LAST-IN, FIRST-OUT INVENTORY COSTING METHODCOSTING METHOD

Using the price of merchandise purchased last to calculate the cost of merchandise sold first is called the last-in, first-out inventory costing method LIFO is an abbreviation for last-in, first-out

Assumes that the merchandise purchased last (last in) is the merchandise sold first (first out)

Uses the earliest purchase prices to determine the cost of merchandise inventory remaining

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1. Assign units from earliest purchase.

2. Assign units from next earliest purchase.

3. Multiply ending inventory units by unit price.

4. Total the ending inventory columns.

LAST-IN, FIRST-OUT LAST-IN, FIRST-OUT INVENTORY COSTING METHODINVENTORY COSTING METHOD page 177

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• OfficeMart has an inventory of 700 three-ring binders on November 30. • Of the 700 units on hand, 500 units are assumed to be the units in the beginning

inventory. The remaining 200 units are assumed to have been purchased on the next earliest date, June.


WEIGHTED AVERAGE INVENTORY WEIGHTED AVERAGE INVENTORY COSTING METHODCOSTING METHOD

Using average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold first is called the weighted-average inventory costing method

Assumes that the cost is an average of the price paid for similar items purchased during the fiscal period.

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WEIGHTED-AVERAGE WEIGHTED-AVERAGE INVENTORY COSTING METHODINVENTORY COSTING METHOD page 177

• OfficeMart has an inventory of 700 three-ring binders on November 30.

• The total cost $1,725 is divided by the total units purchased, 1,500 to calculate the weighted-average cost per unit, $1.15

• The 700 remaining units are assumed to have been purchased at an average cost of $1.15 each


COSTING INVENTORY DURING PERIODS COSTING INVENTORY DURING PERIODS OF INCREASING PRICESOF INCREASING PRICES

The cost of the ending inventory affects the cost of merchandise sold amount on the income statement.

The higher the ending inventory, the lower the cost of merchandise sold amount, and vice versa.

During a period of increasing prices, the FIFO method usually results in the lowest cost of merchandise sold and the highest net income

The LIFO method usually results in the highest cost of merchandise sold & the lowest net income

The higher the cost of merchandise sold, the lower the net income

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COSTING INVENTORY DURING COSTING INVENTORY DURING PERIODS OF INCREASING PRICESPERIODS OF INCREASING PRICES page 178


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COSTING INVENTORY DURING COSTING INVENTORY DURING PERIODS OF DECREASING PRICESPERIODS OF DECREASING PRICES page 179

During a period of decreasing prices, the FIFO method usually results in the highest cost of merchandise sold and the lowest net income

The LIFO method usually results in the lowest cost of merchandise sold & the highest net income

The lower the cost of merchandise sold, the higher the net income


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RESULTS OF THE THREE INVENTORY RESULTS OF THE THREE INVENTORY COSTING METHODS COMPAREDCOSTING METHODS COMPARED page 179


LOWER OF COST OR MARKET LOWER OF COST OR MARKET INVENTORY COSTING METHODINVENTORY COSTING METHOD

Using the lower of cost or market price to calculate the cost of ending merchandise inventory is called the lower of cost or market inventory costing method

Market refers to the current replacement cost of the merchandise item

Two amounts are needed to apply the lower of cost or market method: The cost of the inventory using the FIFO, LIFO, or

weighted-average method The current market price of the inventory

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1. Calculate the cost.

2. Calculate the market price.

3. Determine the smaller number to use as the lower of cost or market amount.

LOWER OF COST OR MARKET LOWER OF COST OR MARKET INVENTORY COSTING METHODINVENTORY COSTING METHOD page 180

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• If the unit price is higher than the market price at the end of a fiscal period, the inventory cost is reduced to the current market price.

• If the unit price is lower than the market price, the inventory cost is maintained at the unit price


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TERMS REVIEWTERMS REVIEW

first-in, first-out inventory costing method last-in, first-out inventory costing method weighted-average inventory costing method lower of cost or market inventory costing method

page 181

century 21 accounting © thomson/south-western lesson 6-2 inventory costing

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