AFM101 Chapter Notes - Chapter 8: Weighted Arithmetic Mean, Radio-Frequency Identification, Barcode
7 Jun 2018
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LO3 Report inventory and cost of sales by using three inventory costing methods.
INVENTORY COSTING METHODS
Alternative ways to assign total Cost of Goods Available for Sale between (1) EI and (2) COS.
3 inventory costing methods to determine the Cost of Sales:
(1) SPECIFIC IDENTIFICATION
Specific identification method = identified the cost of the specific item that was sold.
Cost of each item sold is individually identified & recorded as COS.
IFRS prohibited this method for large numbers of inventory that are interchangeable.
Impractical large quantities of similar items are kept in stock:
Appropriate dealing with very expensive items, because each item tends to differ from
other items.
Method requires keeping track of the purchase cost of each item:
o 1) Coding the purchase cost on each unit before placing it in stock, OR
o 2) Keeping a separate record of the unit and identifying it with a serial number.
Examples: Bar code scanning & radio frequency identification.
To find the COGS add all the item prices.
(2) FIFO (First in, first out)
FIFO = assumes that the earliest goods purchased (the first ones in) are the first units sold
(the first ones out) and the last goods purchased remain in EI.
Yields the same COGS and EI whether you use perpetual or periodic system.
(3) WEIGHTED AVERAGE
Weighted-Average Cost = uses the weighted-average unit cost of the goods available
for sale for both COS and EI.
Does not yield the same COGS and EI when using the perpetual and periodic systems.
(a) Periodic
1) Compute the weighted average.
[Σ (Units * Unit Cost)]/ [Σ Units] Related to the purchases.
2) Determine the cost of goods sold.
COGS = Weighted Average * [Σ Sales Units].
Note: Periodic COS is always higher than the Perpetual COS in a period of rising prices.
o Periodic average cost per unit includes the cost of all units available for sale during
the accounting period.
o Perpetual average cost method considers only the cost of units available for sale
at different dates in the accounting period.
(b) Perpetual
Need to create different weighted-averages cost per unit.
See the example from textbook (Page 425).
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Document Summary
Lo3 report inventory and cost of sales by using three inventory costing methods. Alternative ways to assign total cost of goods available for sale between (1) ei and (2) cos. 3 inventory costing methods to determine the cost of sales: (1) specific identification. Specific identification method = identified the cost of the specific item that was sold. Cost of each item sold is individually identified & recorded as cos. Appropriate dealing with very expensive items, because each item tends to differ from. Ifrs prohibited this method for large numbers of inventory that are interchangeable. Impractical large quantities of similar items are kept in stock: other items. Examples: bar code scanning & radio frequency identification. To find the cogs add all the item prices. (2) fifo (first in, first out) Fifo = assumes that the earliest goods purchased (the first ones in) are the first units sold (the first ones out) and the last goods purchased remain in ei.
