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Inventories
Appendix 6A:
Inventory costing methods
(Periodic inventory system)
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1.
Determine the cost of goods sold and ending inventory under the periodic inventory system for each of the four inventory costing methods:
Specific identification
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Weighted average
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▪
Recall that the periodic inventory system does not continuously keep track of:
– Ending inventory
– Cost of goods sold
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These are calculated at the end of the period using the formula to calculate cost of goods sold
Formula to calculate cost of goods sold
Beginning inventory
+ Net purchases
= Cost of inventory available for sale
- Ending inventory
= Cost of goods sold
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Steps to calculate COGS and ending inventory:
1.Calculate cost of inventory available for sale for the period
2.Taking inventory to determine the number of units on hand
3.Calculate ending inventory using an inventory costing method
4.Calculate cost of goods sold using the value calculated for ending inventory
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We now illustrate how to calculate the cost of goods sold and ending inventory under the periodic inventory system for each of the four inventory costing methods using the following data:
Date
Nov.
Purchases
Description Units Unit cost
Total cost
1 Beginning inventory 50 x $1 = $50
7 Purchases
17 Purchases
27 Sales
75 x $2 = $150
15 x $3 = $45
Sales
Units Selling price
Sales revenues
? x $5 = $300
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Step 1: Calculate inventory available for sale
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Calculated by taking beginning inventory and adding the purchases for the period
Date
Nov.
Purchases
Description Units Unit cost
Total cost
1 Beginning inventory 50 x $1 = $50
7 Purchases
17 Purchases
75 x $2 = $150
15 x $3 = $45
27 Sales
30 Totals 140 units $245
Sales
Units Selling price
Sales revenues
? x $5 = $300
▪
Inventory available for sale = 140 units worth $245
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Step 2: Taking inventory
▪
An inventory count revealed 80 units remaining on hand at the end of the accounting period
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Therefore 140 – 80 = 60 units must have been sold during the accounting period
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But what are the costs assigned to the 80 units of ending inventory and 60 units sold?
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We now calculate ending inventory and cot of goods sold under each inventory costing method in the periodic system
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Step 3: Specific identification - periodic
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The inventory count specifically identified the following number of units at each unit cost
Inventory balance specific identification
Units Unit cost
Total cost
15 $1 $15
55
10
80 units
$2
$3
$110
$30
$155
▪
Ending inventory = $155
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Step 4: Specific identification - periodic
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Use the $155 balance of ending inventory to calculate cost of goods sold
Cost of goods sold – specific identification
Units
Cost of inventory available for sale 140
- Ending inventory
= Cost of goods sold
80
60
$
245
155
90
▪
Cost of goods sold = $90
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Step 3: FIFO - periodic
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FIFO assumes the cost of the 80 units in ending inventory to be that of the most recent purchases
Inventory balance
FIFO
Units
65
Unit cost
$2
Total cost
$130
15
80 units
$3 $45
$175
▪
Ending inventory = $175
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Step 4: FIFO - periodic
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Use the $175 balance of ending inventory to calculate cost of goods sold
Cost of goods sold – FIFO
Units
Cost of inventory available for sale 140
- Ending inventory
= Cost of goods sold
80
60
$
245
175
70
▪
Cost of goods sold = $70
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Step 3: LIFO - periodic
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LIFO assumes the cost of the 80 units in ending inventory to be that of the earliest purchases
Inventory balance
LIFO
Units
50
Unit cost
$1
Total cost
$50
30
80 units
$2 $60
$110
▪
Ending inventory = $110
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Step 4: LIFO - periodic
▪
Use the $110 balance of ending inventory to calculate cost of goods sold
Cost of goods sold – LIFO
Units
Cost of inventory available for sale 140
- Ending inventory
= Cost of goods sold
80
60
$
245
110
135
▪
Cost of goods sold = $135
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Step 3: Weighted average - periodic
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First we need to calculate a weighted average cost of the units of inventory available for sale throughout the period
Total cost of goods available for sale
Weighted average cost =
Total number of units available for sale
=
$245
140 units
= $1.75 per unit
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Step 3: Weighted average - periodic
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We use the weighed average cost multiplied by the number of units to calculate ending inventory
Units x
80 x
Inventory balance
Weighted average
Weighed average cost
$1.75
= Total cost
= $140
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Ending inventory = $140
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Step 4: Weighted average - periodic
▪
Use the $140 balance of ending inventory to calculate cost of goods sold
Cost of goods sold – Weighted average
Units
Cost of inventory available for sale 140
- Ending inventory
= Cost of goods sold
80
60
$
245
140
105
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Cost of goods sold = $105
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Check: 60 units x $1.75 = $105 
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