Calculating Inventory Cost

Inventory costs are constantly changing. Companies must decide how inventory costs will be calculated for the purposes of expensing that inventory when it is sold. There are a number of accepted methods and the method of calculation does not have to match how products actually leave the building. Companies pick a method based on profit and tax objectives. We will look at four methods of calculating costs and the advantages and disadvantages of each method.

Important Terminology

There are a number of important terms that will be used when discussing inventory cost. It is crucial that you know this terminology in order to master this topic. All of these terms can be used to describe a dollar value or a number of units.

Beginning inventory is the amount of inventory a company has at the start of the period. Remember that inventory is an asset and appears on the balance sheet. Purchases are additional units of inventory that have been acquired during the period. If you add beginning inventory and purchases, the total is called Goods Available for Sale. Goods Available for Sale is an important concept because we can use this figure as a check figure when doing calculations.

Goods Available for Sale is the total of all the goods that could have been sold during the period. Some of those units will be sold, which is called Cost of Goods Sold. The items that were not sold are still in inventory. Since it is the end of the period, we refer to this as Ending Inventory. If you add cost of goods sold and ending inventory, it should match the amount in Goods Available for Sale. Whenever you are doing calculations involving inventory, you should make sure you have accounted for everything by adding Cost of Goods Sold and Ending Inventory to ensure it matches Goods Available for Sale.

InvCost1

Periodic and Perpetual Inventory

The rules for periodic and perpetual inventory methods still apply when we look at cost determination. Remember that under the periodic inventory system, cost of goods sold is determined at the end of the year via an adjusting entry. Therefore, when entering sales entries, inventory and cost of goods sold is not a factor. Companies that use the perpetual inventory system are always updating inventory balances. Every sales transaction includes the entry for cost of goods sold. Therefore, under the perpetual system, we must figure out the cost of inventory for every sales entry.

Share This:


Related pages


washington state payroll calculatorformula for overhead rateasset liability equationas 2 valuation of inventories examplespayroll tax liabilitiesentry for accrued expensesvariable expense formulapayroll calculator for employersincome statement contribution marginwhat is the journal entry for accrued expensesjob order costing accountingjournal entry for withholding taxhow do debits and credits affect the accounting equationinterest prtwhat are adjusting journal entriesestimating uncollectible accountscalculate tax deductions paycheckreducing balance method depreciation formulacontra account to accounts receivabledirect labour hours formulaa debit balance in retained earningsaccounting trial balance definitionvariable expense per unit formulaaccounting entry for prepaid expensesreceivable write offexamples of merchandising companiesmerchandising firmsmerchandising income statementdepreciation equation accountingis bank overdraft an expensewhat is the difference between notes payable and accounts payablejob order costing accountingcalculate depreciation straight linequickbooks accumulated depreciationfifo calculationsnormal balance of assetsaverage contribution margin formulaformula for calculating gross salarysales return and allowances normal balanceretail inventory method formulafiguring slopebonds journal entriesaccrued expense journal entryreversing accrued expensesjournal entry of accounts payablethe best estimate of the total monthly fixed cost ishow to calculate provision for doubtful debtscomputation of retained earningsstraight-line discount amortizationexplain the process of reconciling a bank accountdebit credit rules accountingdouble declining balance depreciation methodwhat is medicare taxes in payrollformula of roi return of investmentpvf tablecalculating payroll taxes for employersaccounting for zero coupon bondsentry for prepaid expenseez pass stockdefine fixed and variable costsaccounts receivable and unearned revenueunearned revenue journal entrieswhat is fica medicare taxis notes payable a debit or credittotal variable cost formulalifo vs fifo exampledirect overhead costprepaid insurance on income statementdirect write off method for uncollectible accountsdefine sales returnwhat is the abbreviation for debitnormal balance of unearned revenuehow to compute the cost of goods soldperiodic inventory system closing entriesaverage variable costs formulaequation rearrangeraccounting adjusting entries tutorial