ACCOUNTING FOR INVENTORY

WEEK 12

Goods bought or manufactured for resale but unsold◦ Timing difference between production capacity and

customer demand Valuation is the lower of cost or net realisable

value◦ Affects Income Statement & Balance Sheet

Cost includes all costs of purchase or manufacture to bring inventory to its present location and condition

What is inventory (or stock)

Inventory1. Raw materials – pre-production2. Work in progress - uncompleted3. Finished goods – manufactured or purchased

and ready for sale

Types of inventory

Figure 1: The flow of costs in purchasing Inventory Finished Goods Cost of sales Purchases Increases inventory Sales Decreases inventory Increases cost of sales

Figure 2: The flow of costs in manufacturing Inventory Inventory Inventory Cost of sales Raw materials Work in progress Finished goods Purchases Increases inventory Issued to prod’n Decreases inventory Increases inventory Production labour Increases inventory Production overhead Increases inventory Completed production Decreases inventory Increases inventory Sales of finished goods Decreases inventory Increases

cost of sales

Differentiated products: segregated or not interchangeable – specifically identifiable, e.g. a vehicle to a car dealer◦ Actual cost for each item

Similar/undifferentiated products◦ Weighted average◦ FIFO (first in, first out)◦ LIFO (last in, first out)

Cost formulae

A product is purchased on three separate occasions:

Units Unit price Total cost5,000 $1.20 $6,0002,000 $1.25 $2,5003,000 $1.27 $3,810

Calculate the cost of 6,000 units sold and the value of inventory

Illustration

Units Unit price Total cost5,000 $1.20 $6,0002,000 $1.25 $2,5003,000 $1.27 $3,81010,000 $12,310 The weighted average cost is $12,310/10,000 =

$1.231 per unit. The cost of goods sold is 6,000 @ $1.231 =

$7,386 The value of inventory is 4,000 @ $1.231 =

$4,924

Weighted average

Units Unit price Total cost Cost of sales5,000 $1.20 $6,000 5000@$1.20=$6,0002,000 $1.25 $2,500 1000@$1.25=$1,2503,000 $1.27 $3,810

6000 $7,250

Units Unit price Total cost Inventory value5,000 $1.20 $6,0002,000 $1.25 $2,500 1000@$1.25= $1,2503,000 $1.27 $3,810 3,000@$1.27=$3,810

4,000 $5,060

Total $12,310

FIFO

Units Unit price Total cost Cost of sales5,000 $1.20 $6,000 3000@$1.27=$3,8102,000 $1.25 $2,500 2000@$1.25=$2,5003,000 $1.27 $3,810 1000@$1.20 =$1,200

6000 $7,510

Units Unit price Total cost Inventory value5,000 $1.20 $6,0002,000 $1.25 $2,500 4000@$1.20=$4,8003,000 $1.27 $3,810

Total $12,310

LIFO

If 6,000 units sold @ $2.00Sales $12,000Cost of sales (WAM) 7,386Gross profit 4,614

Sales $12,000Cost of sales (FIFO) 7,250Gross profit 4,750

Comparison of methods

exercise

Calculate COGS with:1. FIFO ( Perpetual & Periodic)2. LIFO ( Perpetual & Periodic)3. Average ( Perpetual & Periodic)

Details TGL Units harga Total Units dijual

Beginning inventory

1/1/06 200 $2 $400

purchase 15/1/06 300 $3 $900

Sales 17/1/06 250

Purchase 28/1/06 500 $4 $2 000

Sales 30/1/06 400

HOMEWORK : Job costing Helo Pty Ltd manufactures components for helicopters. It does

so in batches of 100 components. Each batch requires 500 kgs of rolled and formed steel, which takes 15 hours of labour.

Transactions for the month: Purchase of steel 1,000kgs @ $12/kg Issue of steel to production 500 kgs Direct labour to roll and form 500 kgs steel 15 hours @

$125/hour Overhead allocated at completion of production of 100

components $2,000. 60 of the components manufactured in the batch were sold

for $130 each. At month end, 500 kgs of steel has been issued to production

and 7 hours have been worked. The job is incomplete. Calculate the value of work in progress at month end.