Planning Ahead
Inventory is an important part
of many businesses.
Can you think of problems
that might arise from having
too much or too little of a
product in stock?
Lesson Objective
Us the average-cost, FIFO, and LIFO methods to compute
inventory value.
Content Vocabulary
average-cost method
first in, first out (FIFO)
last in, first out (LIFO)
average-cost
first
last
in,
in, first
first out
out
method
(LIFO)
(FIFO)
A method
way of valuing
for managing
inventory
physical
basedflow
on
theinventory
of
average that
costassumes
of goods that
received
the
by a business.
oldest
most
recently
inventory
purchased
is sold first.
merchandise is the first to be sold.
Example 1
Wholesale Paint Supply is valuing its
inventory of white latex paint.
On March 1, Wholesale Paint Supply had 88
gallons of white latex paint on hand.
What is the value of the inventory on March 1?
Example 1 (cont.)
Example 1 Answer: Step 1
Find the average cost per unit.
Total Cost of Units ÷ Number Received
$542 ÷ 240 = $2.2583 or $2.26
Example 1 Answer: Step 2
Find the inventory value.
Average Cost per Unit × Number on Hand
$2.26 × 88 = $198.88
Key Words to Know
first in, first out (p. 590)
A method of valuing inventory that assumes the
first items received are the first items shipped
out. Called FIFO for short.
Example 2
For Wholesale Point Supply in Example 1,
find the cost of goods and the value of
inventory using the FIFO method.
Find the cost of goods sold using the FIFO
method.
Example 2 Answer: Step 1
Find the items purchased. (Note: This assumes
the first items purchased are the items sold
first.)
a. Read the table in Example 1. You’ll see that
240 units were received. Refer to Step 2 in
Example 1. There were 88 items on hand.
240 – 88 = 152 units sold
Example 2 Answer: Step 1 (cont.)
b. Under the FIFO method, the 152 units sold
were assumed as follows:
*152 (units sold) – 80 – 40 = 32
Example 2 Answer: Step 1 (cont.)
c. Add the total cost of the units received.
$172.00 + $90.00 + $73.60 = $335.60
(Note: You do not include in this step the
units received on Feb. 22, because those
units will help you calculate the value of the
inventory, as you’ll see in Step 2.)
Example 2 Answer: Step 2
Find the value of the inventory using FIFO.
(Note: There are 88 units on hand—refer to Step
2 in Example 1.)
a. The items remaining were:
Example 2 Answer: Step 2 (cont.)
**If you go back to Example 1, Step 2, you’ll
notice that on Feb. 15, 80 units were
received. Out of that 80, only 32 were
purchased. Therefore, 88 – 32 = 48 items
remaining in inventory.
Example 2 Answer: Step 2
b. Find the value of the ending inventory.
(Note: The cost of the ending inventory is
computed by using the cost of the most
recent units received.)
$110.40 + $96.00 = $206.40
Key Words to Know
last in, first out (LIFO) (p. 591)
A method of valuing inventory that assumes the
last items received are the first items shipped
out. Called LIFO for short.
Example 3
For Wholesale Point Supply in Example 1,
find the cost of goods and the value of
inventory using the LIFO method.
Example 3 Answer: Step 1
Find the items purchased.
a. Read the table in Example 1. You’ll see
that 240 units were received. Refer to Step 2
in Example 1. There were 88 items on hand.
240 – 88 = 152 units sold
Example 3 Answer: Step 1 (cont.)
b. Under the LIFO method, the 152 units sold
were assumed as follows:
*152 units sold – 80 – 40 = 32 units received
Example 3 Answer: Step 1 (cont.)
c. Add the total cost of the units received.
$96.00 + $184.00 + $72.00 = $352.00
Example 3 Answer: Step 2
Find the value of the inventory using LIFO.
(Note: There are 88 units on hand—refer to Step
2 in Example 1.)
a. The items remaining were:
Example 3 Answer: Step 2 (cont.)
**If you go back to Example 1, Step 2, you’ll
notice that 88 units were on hand. Of that 88
on hand, on Feb. 1, 80 units were sold.
Therefore, 88 – 80 = 8 units received.
Example 3 Answer: Step 2
b. Find the value of the ending inventory.
$172.00 + $18.00 = $190.00
Practice 1
Find the average cost per unit and the
inventory value.
Total cost of units: $509.78
Number received: 142
Number on hand: 86
Practice 1 Answer
Average cost per unit: $3.59
Inventory value: $308.74
Practice 2
Find the average cost per unit and the
inventory value.
Total cost of units: $1,316.79
Number received: 187
Number on hand: 123
Practice 2 Answer
Average cost per unit: $7.04
Inventory value: $865.92