ITFT - COST ACCOUNTING

Why is Inventory Control
Important?
Inventory is a significant asset and for many
companies the largest asset.
Inventory is central to the main activity of
merchandising and manufacturing
companies.
Mistakes in determining inventory cost can
cause critical errors in financial statements.
Inventory must be protected from external
risks ( such as fire and theft) and internal
fraud by employees.

Receiving
report
Purchase
order
Invoice
AGREE
JOURNAL
Description
Nov. 9
Post.
Ref.
Date
Inventory 1 222 00
Accounts Payable--XYZ Co. 1 222 00
Purchased merchandise on
account.

LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS &
EXPENSES
Effect of Inventory Errors on
Financial Statements
Merchandise
Inventory
Cost of
Merchandise Sold
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
overstated
understated
overstated
overstated
Net Income

If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
understated
overstated
understated
understated
Effect of Inventory Errors on
Financial Statements

Purchased
goods
Sold
goods
Inventory Cost Flow
Assumptions

Inventory Costing Methods
40%
30%
20%
10%
0%
43%
34%
19%
4%
Fifo Lifo Average Other

Perpetual Inventory Costs
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

FIFO ( Cost Accounting)
• FIFO is most useable technique of valuation
of material issue in manufacturing and
trading industries.
• It means First in, First Out.
• We will send that material for
production first which we bought first.
• We also record the cost of issue on this basis.

• Closing stock's value in store will be the
purchase value of material which we
purchased at the end.
• This system of valuation of cost is very useful
where there is the trend of decreasing prices,
because we will charge high cost to the units
which we bought earlier to new.
• But this method is not useful in the trend of
increasing prices.

Merits of FIFO Method
• This method is very logical because material
should be issued first which we bought first.
• Because we issue the material at its purchase
price, so closing stock can be calculated correctly.
• Closing stock's cost automatically shows the
market price.

Demerits of FIFO Method
• In case, there is fluctuation in prices, we can
not calculate correct cost of material issued.
• We also can not compare on job's cost with
other job's cost in case prices are fluctuating.
• This is not good method in inflation.

Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
The firm begins the year with 10
units of Item 127B on hand at a
total cost of $200.

Cost of
Mdse. Sold
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
On January 4, 7 units of Item
127B are sold at $30 each.

Item 127B
The sale of 7 units leaves a
balance of 3 units.
Jan. 1 10 20 200
4 7 20 140 3 20 60
Jan. 1 10 20 200
On January 4, 7 units of Item
127B are sold at $30 each.

Cost of
Mdse. Sold
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
On January 10, the firm purchased
eight units at $21 each.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 10, the firm
purchased eight units at $21 each.
Because the purchase price of $21 is
different than the cost of the previous 3
units on hand, the inventory balance of
11 units is accounted for separately.

Cost of
Mdse. Sold
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
On January 22, the firm sold
four units for $31 each.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
Of the four units sold, three are
from the first units in (fifo) at a
cost of $20.
On January 22, the
firm sold four units
for $31 each.

sold two units at $32.
Cost of
Mdse. Sold
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
sold two units at $32.

On January 30, purchased ten additional
units of Item 127B at $22 each.
Cost of
Mdse. Sold
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
30 10 22 220 5 21 105
10 22 220
Totals 18 $388 13 $263 15 $325
On January 30, purchased
ten additional units of Item
127B at $22 each.

What is LIFO
• In this method of valuation of inventory, we
calculate the inventory issue cost by reverse
order.
• It means that we charge old quantities price
first for issue of material and then new prices
will be charged.
• It is just opposite of FIFO. It is most suitable in
inflation of prices.

• In other words, LIFO is last-in, first-out,
meaning that the most recently purchased
items are recorded as issued for production
first from store.
• If LIFO is used for calculating the cost of goods
sold and closing stock, then it will calculated
for calculating correct gross and net profit.
• At that time, we take last (latest) purchase
price for sold material first time.

Item 127B
LIFO Perpetual Inventory Account
Jan. 1 10 20 200
The firm begins the year with
10 units of Item 127B on
hand at a total cost of $200.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
On January 4, the firm sold
7 units at $30 each.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 10, the
firm purchased eight
units at $21 each.
Note that a new
layer is formed.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 22, the
firm sells four
units at $31 each.
22 4 21 84 3 20 60
4 21 84
Of the 4 units sold, all come
from the most recent purchase
at a cost of $21 each.

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 28, sold
two units at $32 each.
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 30, purchase
10 units at $22 each.
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220

Item 127B
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220
Totals 18 $388 13 $266 15 $322

Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase300 units @ $10
400 units @ $11 Sept. 21 Purchase
100 units @ $12 Nov. 18 Purchase
1,000 units available
for sale during
year
Fifo Periodic

Fifo Periodic
200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
for sale during
year
$10,400
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
Cost of merchandise
available for sale

Fifo Periodic
A physical count on
December 31 reveals that
700 of the 1,000 units
have been sold.
Using fifo, the first units
purchased are theoretically the
first units sold. We begin the
count with January 1.

Fifo Periodic
200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
for sale during
year
$10,400
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
Sold these 200
Sold these 300
Sold 200 of these200 units @ $11
= $ 0 Jan. 1
= 0 Mar. 10
= 2,200 Sept. 21
$ 3,400
Ending inventory

Cost of merchandise available for
sale $10,400
Less ending inventory 3,400
Cost of merchandise sold $ 7,000
Fifo Periodic

Jan. 1
200 units at $9
Summary of Fifo Periodic
Mar. 10
300 units at $10
Sep. 21
400 units at $11
Nov. 18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400
$2,200
$1,200
$7,000
Merchandise
Inventory
$3,400
300 units at $10
200 units at $11
200 units at $11
100 units at $12
1,000 units
700 units
300 units

Jan. 1 Beginning
Inventory
200 units @ $9
for sale during
year
Lifo Periodic
Using lifo, the most recent batch
purchased is considered the first
batch of merchandise sold.

Jan. 1 Beginning
Inventory
200 units @ $9
for sale during
year
Lifo Periodic
Assume again that
700 units were sold
during the year.

200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
for sale during
year
Lifo Periodic
Sold these 100
Sold these 400
Sold 200 of these100 units @ $10
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
$10,400
0
0
1,000
Ending Inventory
$2,800

Cost of merchandise available for
sale $10,400
Less ending inventory 2,800
Lifo Periodic

Jan. 1
200 units at $9
Summary of Lifo Periodic
Mar. 10
300 units at $10
Sep. 21
400 units at $11
Nov. 18
100 units at $12
$1,800
$3,000
$4,400
$1,200
$1,800
$1,000
Cost of
Merchandise
Sold
200 units at $9
$10,400
$4,400
$1,200
$2,800
$7,600
100 units at $10
200 units at $10
400 units at $11
100 units at $12
$2,000
700 units
1,000 units
300 units
Purchases
Merchandise
Available
for Sale
$1,800
Cost of
Merchandise Sold

Jan. 1 Beginning
Inventory
200 units @ $9
for sale during
year
The average cost
periodic method is based
on the average cost of
identical units.
Average Cost Periodic

200 units @ $9 = $ 1,800
for sale during
year
300 units @ $10 = $ 3,000
400 units @ $11 = $ 4,400
100 units @ $11 = $ 1,200
$10,400 Cost of
merchandise
available for
sale

Cost of Merchandise
Available for Sale
Units Available for Sale
During Year
= Average Unit Cost
$10,400
1,000 Units
= $10.40 per Unit

Cost of merchandise available for sale $10,400
Less ending inventory ($10.40 x 300) 3,120
To verify this
amount, multiply
700 units sold
times $10.40 to get
the same $7,280.

$ 3,800
2,700
4,650
3,920
Total $15,520 $15,472 $15,070
Valuation of Inventory at
Lower-of-Cost-or-Market
A 400 $10.25 $ 9.50 $ 4,100 $ 3,800
B 120 22.50 24.10 2,700 2,892
C 600 8.00 7.75 4,800 4,650
D 280 14.00 14.75 3,920 4,130
Unit Unit
Inventory Cost Market Total Total Lower
Item Quantity Price Price Cost Market C or M
The market decline based on individual items
($15,520 – $15,070) = $450

Assets
Current assets:
Cash $ 19 400 00
Accounts receivable $80 000 00
Less allowance for
doubtful accounts 3 000 00 77 000 00
Merchandise inventory
at lower of cost (first-in,
first-out method) or market 216 300 00
Metro-Arts
Balance Sheet
December 31, 2007
Presentation of Merchandise Inventory
on the Balance Sheet

ITFT - COST ACCOUNTING

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