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.

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


cogs formulawhat is double declining depreciationmanagerial accounting performance evaluationpresent value annuity factor calculatorhow is fica tax calculatedaccounts payable journal entry examplewhat is depreciable amountwhat are closing entries and why are they necessaryexamples of unearned revenueunrecorded carsmanufacturing overhead costs formulameaning of overhead cost in accountingprepaid rent on balance sheetaccount receivable journal entrylifo equationcurrent medicare tax ratedeductions from gross payjournalize adjusting and closing entriesmanufacturing wipdirect costing methodfifo perpetual methoddefine total asset turnoverjournal entry for issuing stockcost accounting sumsemployers payroll tax calculatorcalculate employer portion of payroll taxescost of good sold statement formatmonthly closing entries accountingmake or buy decision in management accountingreturn on operating assets formulaaccounts receivable debit balanceaverage overhead cost per employeemerchandise inventory adjusting entryhow to calculate straight line depreciation ratecost of good sold equationbank reconciliationspayroll tax calculator 2015example of manufacturing overheadlifo perpetual inventory method examplewhen valuing ending inventory under a perpetual inventory system thedepreciation straight line formuladepreciation expense entryhow to figure taxes on a paycheckjournal entry to record sale of inventorypayroll calculator waperiodic inventory system and perpetual inventory systemaccounting overheadsannuity present value calculatorformula for total asset turnover ratioweighted average process costingfour inventory costing methodsentry for allowance for doubtful accountssales accrual journal entryperpetual stock countman hour cost calculationformula for cost of good soldmanagerial accounting principleshow to journalize closing entriesexamples of current liabilities on a balance sheethow to compute cogsbookkeeping t accountswhat is periodicity in accountingformula for calculating present value of annuityhow to calculate retained profitcompute ending inventoryfederal withholding tax percentagehow is federal unemployment tax calculatedjournal entry bad debt expensefactory overhead cost formulawhats a fixed costjournal entry for writing off accounts receivablecalculating source deductionscogs to salescalculate present value of annuity duebond amortization accountingjournal entries for provisionspresent value annuity due tablecost recovery deduction calculatormerchandising accounting journal entries