cost of inventory

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.


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

what is the purpose of a post closing trial balancegaap managerial accountingweighted average mark calculatorcurrent liabilities equationfed withholding taxhow to prepare adjusting entriesjob order costing formulabond effective interest rate calculatorwhat goes on the debit side of a trial balancegross up paycheck calculatorallowance for doubtful accounts debit balanceexamples of indirect laborthe accounting equation and the balance sheethow do you calculate overhead costdirect material formulais a p&l the same as an income statementhow to do statement of cash flows indirect methodaccumulated depreciation exampletotal variable manufacturing cost per unitstraight line depreciation useful lifemanufacturing p&ldirect labor cost definitionpresent value of an annuity definitionaccounts payable is considered a on the trial balanceunearned revenue in income statementtrial balance worksheet examplejournal entry for amortizationvariable manufacturing overhead formulaformula to find variable costdefine merchandise inventoryallowance for doubtful accounts journal entriesapplied fixed overheadformula for overhead raterevenue and expense accounts are nothing more than temporary accountsdifficult accounting entriescredit sales journal entrytraceable fixed costshow to calculate employer portion of payroll taxes200000 annuityprovision for bad and doubtful debts entrypv of an ordinary annuityformula for double declining balancepremium bond certificatesthe purpose of closing entries is to transferreturn on investment measureswhat is normal balance in accountingwhat is the normal balance of accounts receivablebond issue calculatorcost of ending inventory formulaadjusted trial balance example problempresent value of an annuitygross profit ratio equationposting journal entries to t accountsaccounting for merchandise inventoryaccounting adjusting entries problemshow to calculate payroll withholdingpresent value annuity chartaccrual entries in accounts payablegross method perpetual inventory systemsimple interest payment formuladirect manufacturing laborbad debt and doubtful debtwhat is declining balance depreciationhow to calculate closing stock formulastatement of cashflowaccounts receivable debit or credit balanceincome statements examplesdefine checkbookjournal entries for perpetual inventory systemlabour cost per unit formulawhat is favourable varianceadjusting entry accountingunearned revenue earned journal entryunemployment taxes withheldmedicare wage basefifo methodsjournal entries depreciationadjusting entries example problemsmethods of valuing inventoryhow to compute the predetermined overhead ratesalvage value depreciationss wage limit