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Unformatted text preview: oods “in place” and “in condition” forand “in condition” for their resale. This means that inventory cost would include the invoice price, items relating
This means that inventory cost would include the invoice price, freight-in, and similarfreight-in, and similar items r
to the general rule. costs” like “carrying costs” like interest charges (if to
to the general rule. Conversely, “carryingConversely,interest charges (if money was borrowed money was borrowed
buy the inventory), storage costs, and insurance on goods held awaiting sale
buy the inventory), storage costs, and insurance on goods held awaiting sale would not be includedwould not be incl
in inventory accounts;in inventory accounts; instead expensed aswould be expensed as incurred. and
instead those costs would be those costs incurred. Likewise, freight-out Likewise, freight-ou
sales commissions a selling expensed than being included with inventory.
sales commissions would be expensed aswould be cost ratheras a selling cost rather than being included with invent Download free ebooks at bookboon.com
25 Inventory Costing Methods Current Assets: Part II 6.2 Costing Methods
Once the unit cost of inventory is determined via the preceding rules of logic, specific costing
methods must be adopted. In other words, each unit of inventory will not have the exact same cost,
and an assumption must be implemented to maintain a systematic approach to assigning costs to
units on hand (and to units sold).
To solidify this point, consider a simple example: Mueller Hardware has a storage barrel full of
nails. The barrel was restocked three times with 100 pounds of nails being added at each restocking.
The first batch cost Mueller $100, the second batch cost Mueller $110, and the third batch cost
Mueller $120. Further, the barrel was never allowed to empty completely and customers have
picked all around in the barrel as they bought nails from Mueller (and new nails were just dumped
in on top of the remaining pile at each restocking). So, its hard to say exactly which nails are
“physically” still in the barrel. As you might expect, some of the nails are probably from the first
purchase, some from the second purchase, and some from the final purchase. Of course, they all
look about the same. At the end of the accounting period, Mueller weighs the barrel and decides that
140 pounds of nails are on hand (from the 300 pounds available). The accounting question you must
consider is: what is the cost of the ending inventory? Remember, this is not a trivial question, as it
will bear directly on the determination of income! To deal with this very common accounting
question, a company must adopt an inventory costing method (and that method must be applied
consistently from year to year). The methods from which to choose are varied, generally consisting
of one of the following: First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Weighted-average Each of these methods entail certain cost-flow assumptio...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.
- Fall '13