inventory costing and capacity analysis ppt and inventory cost flow methods ppt
Dr.DouglasPatton,United States,Teacher
Published Date:26-07-2017
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CHAPTER
6
INVENTORY COSTING
www.Thesisscientist.comINVENTORY BASICS
• In the balance sheet of merchandising and
manufacturing companies, inventory is frequently
the most significant current asset.
• In the income statement, inventory is vital in
determining the results of operations for a
particular period.
• Gross profit (net sales - cost of goods sold)
is closely watched by management,
owners, and other interested parties.
www.Thesisscientist.comPerpetual vs. Periodic
Inventory Accounting
• Perpetual
– Updates inventory and cost of goods sold
after every purchase and sales transaction
• Periodic
– Delays updating of inventory and cost of
goods sold until end of the period
– Misstates inventory during the period
This chapter covers the periodic inventory method.
www.Thesisscientist.comDETERMINING INVENTORY
QUANTITIES
• In order to prepare financial statements, it is necessary
to determine the number of units of inventory owned by
the company at the statement date, and to value them.
• The determination of inventory quantities involves
1. taking a physical inventory of goods on hand, and
2. determining the ownership of goods.
• Taking a physical inventory involves counting,
weighing, or measuring each kind of inventory on hand.
www.Thesisscientist.comTAKING A PHYSICAL INVENTORY
A company, in order to minimize errors in
taking the inventory, should adhere to internal
control principles by adopting the following
procedures:
1. Employees who do not have custodial
responsibility for the inventory should do
the counting (segregation of duties).
2. Each counter should establish the
authenticity of each inventory item
(establishment of responsibility).
www.Thesisscientist.comTAKING A PHYSICAL INVENTORY
3. Another employee should make a second
count (independent verification).
4. All inventory tags should be pre-numbered
and accounted for (documentation
procedures).
5. At the end of the count, a designated
supervisor should ascertain that all
inventory items are tagged and that no
items have more than one tag
(independent verification).
www.Thesisscientist.comTERMS OF SALE
FOB Shipping Point FOB Destination Point
Seller
Seller
Ownership
passes to
buyer here
Public Public
Ownership
Carrier Carrier
passes to
Co. Co.
buyer here
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Buyer BuyerDETERMINING OWNERSHIP OF
CONSIGNED GOODS
• Under a consignment arrangement, the
holder of the goods (called the consignee)
does not own the goods.
• Ownership remains with the shipper of the
goods (consignor) until the goods are
actually sold to a customer.
• Consigned goods should be included in the
consignor’s inventory, not the consignee’s
inventory.
Owned by a consignor; do not
count in our (consignee) inventory
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Consignee CompanySALES TRANSACTIONS
General Journal J1
Date Account Title and Explanation Ref Debit Credit
May 4 Accounts Receivable 3,800
Sales 3,800
To record credit sale.
Only one entry is required to record a sale
under a periodic method.
www.Thesisscientist.comRECORDING SALES RETURNS
AND ALLOWANCES
General Journal J1
Date Account Title and Explanation Ref Debit Credit
May 8 Sales Returns and Allowances 300
Accounts Receivable 300
To record returned goods.
The normal balance of Sales Returns and
Allowances is a debit. Sales Returns and
Allowances is a contra revenue account to the
Sales account.
www.Thesisscientist.comPURCHASES OF
MERCHANDISE
General Journal J1
Date Account Title and Explanation Ref Debit Credit
May 4 Purchases 3,800
Accounts Payable 3,800
To record goods purchased on
account, terms n/30.
For purchases on account, Purchases is
debited and Accounts Payable is credited. For
cash purchases, Purchases is debited and Cash
is credited.
www.Thesisscientist.comPURCHASE RETURNS AND
ALLOWANCES
General Journal J1
Date Account Title and Explanation Ref Debit Credit
May 8 Accounts Payable 300
Purchase Returns and Allowances 300
To record return of goods
For purchases returns and allowances that were
originally made on account, Accounts Payable is
debited and Purchase Returns and Allowances is
credited. The Purchase Returns and Allowances
account is a contra account.
www.Thesisscientist.comACCOUNTING FOR FREIGHT COSTS
General Journal J1
Date Account Title and Explanation Ref Debit Credit
May 4 Freight In 150
Cash 150
To record payment of freight.
When the purchaser directly incurs the
freight costs, the account Freight In is
debited and Cash is credited.
www.Thesisscientist.comHIGHPOINT ELECTRONICS
Income Statement
For the Year Ended December 31, 2002
Sales revenue
Sales 480,000
Less: Sales returns and allowances 20,000
Net sales 460,000
Cost of goods sold
Inventory, January 1 36,000
Purchases 3 25,000
Less: Purchase returns and allowances 17,200
Net purchases 3 07,800
Add: Freight in 12,200
Cost of goods purchased 3 20,000
Cost of goods available for sale 356,000
Inventory, December 31 40,000
Cost of goods sold 316,000
Gross profit 144,000
Operating expenses
Salaries expense 45,000
Rent expense 19,000
Utilities expense 17,000
The multi-step income statement under the
Advertising expense 16,000
periodic system requires more detail in the cost
Amortization expense 8,000
Freight out 7,000
of goods sold section, as shown above.
Insurance expense 2,000
Total operating expenses 114,000
Net income 30,000
www.Thesisscientist.comALLOCATION OF INVENTORIABLE COSTS
Ending
Beginning Inventory
Inventory (Balance
Sheet)
Cost of Goods
Available for Sale
Goods
Cost of Goods
Purchased
Sold (Income
during the
Statement)
year
www.Thesisscientist.comUSING ACTUAL PHYSICAL
FLOW COSTING
• The specific identification method tracks the
actual physical flow of the goods.
• Each item of inventory is marked, tagged, or
coded with its specific unit cost.
• It is most frequently used when the company
sells a limited variety of high unit-cost items.
www.Thesisscientist.comUSING ASSUMED COST
FLOW METHODS
• Other cost flow methods are allowed since
specific identification is often impractical.
• These methods assume flows of costs that
may be unrelated to the physical flow of
goods.
• Cost flow assumptions:
1. First-in, first-out (FIFO).
2. Average cost.
3. Last-in, first-out (LIFO).
www.Thesisscientist.comFIFO
• The FIFO method assumes that the earliest
goods purchased are the first to be sold.
• Often reflects the actual physical flow of
merchandise.
• Under FIFO, the costs of the earliest goods
purchased are the first to be recognized as
cost of goods sold. The costs of the most
recent goods purchased are recognized as
the ending inventory.
www.Thesisscientist.comFIFO method assumes earliest
goods purchased are the first to be
sold
www.Thesisscientist.comAVERAGE COST
• The average cost method assumes that the
goods available for sale are homogeneous.
• The allocation of the cost of goods available
for sale is made on the basis of the
weighted average unit cost incurred.
• The weighted average unit cost is then
applied to the units sold to determine the
cost of goods sold and to the units on hand
to determine the ending inventory.
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