Accounting for Material Valuation Methods in Inventory Management
Explore different methods of accounting for material valuation in inventory management, such as Average Cost Method, First-In-First-Out (FIFO) Method, and Last-In-First-Out (LIFO) Method. Understand how these methods impact the valuation of closing stock and inventory costs.
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UNIT 2: Accounting for Material Accounting for Material Trabelsi Slaheddine (c) 2013 1
As inventory different different there needs instance, inventory SAR attributed inventory is is usually different different costs) there is is a a need needs to instance, inventory three SAR 60 attributed to usually purchased (or costs) over need to to be if if three times 60 and to inventory As purchased at manufactured an accounting to determine be assigned a a times in and SAR inventory at at at rates rates manufactured accounting period, determine what assigned to company in a a year SAR 70 at the (or at over an period, what cost inventory. . For purchased year at what cost the year cost For to inventory company purchased at SAR cost must year end? SAR 50 must be end? 50, , be 70, , what Trabelsi Slaheddine (c) 2013 2
A good estimate of closing stock is provided by three methods of stock valuation: A good estimate of closing stock is provided by three methods of stock valuation: First Last Average Cost (AVCO) Method First- -In Last- -In Average Cost (AVCO) Method In- -First In- -First First- -Out (FIFO) Method First- -Out (LIFO) Method Out (FIFO) Method Out (LIFO) Method Trabelsi Slaheddine (c) 2013 3
In this method we assume that the first set of inventory received is the first to leave the warehouse. The resulting ending inventory will be valued at current prices. Trabelsi Slaheddine (c) 2013 4
Example Example Bike LTD purchased 10 bikes during January and sold 6 bikes, details of which are as follows: January 1 : Purchased 5 bikes @ $50 each January 5: Sold 2 bikes January 10 : Sold 1 bike January 15 : Purchased 5 bikes @ 70 each January 25 : Sold 3 bikes Trabelsi Slaheddine (c) 2013 5
Date Purchase Issues Inventory Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total Jan 1 Jan 5 Jan 10 Jan 15 Jan 15 Jan 25 1 70 70 4 70 280 Trabelsi Slaheddine (c) 2013 6
In this method we assume that the last set of inventory received is the first to leave the warehouse. The resulting ending inventory will be valued at older prices. Trabelsi Slaheddine (c) 2013 7
Date Purchase Issues Inventory Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total Jan 1 Jan 5 Jan 10 Jan 15 Jan 15 Jan 25 2 70 140 4 240 Trabelsi Slaheddine (c) 2013 8
In this method, each time goods are purchased we calculate a new average cost of inventory. The average cost is calculated using the equation The resulting ending inventory will be valued at the last calculated average. Average cost of inventory= Quantity of goods on hand Total value of goods on hand Trabelsi Slaheddine (c) 2013 9
Date Purchase Issues Inventory Units $/Units $ Total Units $/Units $ Total Units $/Units $ Total Jan 1 Jan 5 Jan 10 Jan 15 Average Cost of Inventory Jan 25 3 64.286 192.858 4 64.286 257.144 Trabelsi Slaheddine (c) 2013 10
Cindy Sheppard runs a candy shop. She enters into the following transactions during July: - July 1 Purchases 1,200 lollypops at $1 each - July 13 Purchases 500 lollypops at $1.20 each. - July 14 Sells 700 lollypops at $2 each. Calculate the value of inventory in the end of the month Cindy Sheppard runs a candy shop. She enters into the following transactions during July: July 1 Purchases 1,200 lollypops at $1 each July 13 Purchases 500 lollypops at $1.20 each. July 14 Sells 700 lollypops at $2 each. Calculate the value of inventory in the end of the month Trabelsi Slaheddine (c) 2013 11
1 Mar opening balance 880 @ $9 2 Mar purchase 300 @ $6 4 Mar sell 400 6 Mar sell 600 10 Mar purchase 400 @ $8 15 Mar purchase 500 @ $5 22 Mar sell 900 27 Mar purchase 200 @ $2 28 Mar sell 100 30 Mar purchase 900 @ $3 31 Mar sell 700 What is the closing balance if this business uses the FIFO , LIFO, ACCO method? 1 Mar opening balance 880 @ $9 2 Mar purchase 300 @ $6 4 Mar sell 400 6 Mar sell 600 10 Mar purchase 400 @ $8 15 Mar purchase 500 @ $5 22 Mar sell 900 27 Mar purchase 200 @ $2 28 Mar sell 100 30 Mar purchase 900 @ $3 31 Mar sell 700 What is the closing balance if this business uses the FIFO , LIFO, ACCO method? Trabelsi Slaheddine (c) 2013 12
