In order for the organization to stay competitive, the inventory control and valuation is important. An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.
The two most widely used inventory accounting systems are the periodic and the perpetual.
- Perpetual: The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out.
- Periodic: In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods
JUST IN TIME (JIT)
- No material are purchased and no product are manufactured until they are needed
- To reduce or eliminate inventories at every stage of production
- Minimize storage cost
FIFO (First In First Out)
- First material in will be the first material issued
- Most logical method and accepted by IRB
- Lower cost, higher profit
LIFO (Last In First Out)
- Most recent material received, will be the first to be issued
- Not really logical and not accepted by IRB
- Higher cost, lower profit
WEIGHTED AVERAGE
- Material issued is valued at average cost price
- Accepted by IRB
| Weighted Average | = | Total Cost of Inventory |
| Unit Cost | Total Units in Inventory |
Like FIFO and LIFO methods, AVCO is also applied differently in periodic inventory system and perpetual inventory system. In periodic inventory system, weighted average cost per unit is calculated for the entire class of inventory. It is then multiplied with number of units sold and number of units in ending inventory to arrive at cost of goods sold and value of ending inventory respectively. In perpetual inventory system, we have to calculate the weighted average cost per unit before each sale transaction.
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I also uploaded the a calculation sheet to calculate the FIFO, LIFO and WACO. If possible try to download this, make 3 copies and we will use them in class.
Example - FIFO
Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.
| Mar 1 | Beginning Inventory | 68 units @ $15.00 per unit |
| 5 | Purchase | 140 units @ $15.50 per unit |
| 9 | Sale | 94 units @ $19.00 per unit |
| 11 | Purchase | 40 units @ $16.00 per unit |
| 16 | Purchase | 78 units @ $16.50 per unit |
| 20 | Sale | 116 units @ $19.50 per unit |
| 29 | Sale | 62 units @ $21.00 per unit |
Example - LIFO
Use LIFO on the following information to calculate the value of ending inventory and the cost of goods sold of March.| Mar 1 | Beginning Inventory | 60 units @ $15.00 |
| 5 | Purchase | 140 units @ $15.50 |
| 14 | Sale | 190 units @ $19.00 |
| 27 | Purchase | 70 units @ $16.00 |
| 29 | Sale | 30 units @ $19.50 |
Example - AVCo
Apply AVCO method of inventory valuation on the following information, first in periodic inventory system and then in perpetual inventory system to determine the value of inventory on hand on Mar 31 and cost of goods sold during March.
| Mar 1 | Beginning Inventory | 60 units @ $15.00 per unit |
| 5 | Purchase | 140 units @ $15.50 per unit |
| 14 | Sale | 190 units @ $19.00 per unit |
| 27 | Purchase | 70 units @ $16.00 per unit |
| 29 | Sale | 30 units @ $19.50 per unit |
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