Costing Inventory through FIFO, LIFO and Weighted Average Inventory Once you have counted your inventory

you need to value it. To do this, most companies will search for the Purchase Invoices to determine the unit prices and develop the overall value by multiplying the unit price by the quantity of the item you have on hand. Companies can use one of three ways to do this. They are: First in, first out method (FIFO) - an inventory costing method which assumes that the first items placed in inventory are the first sold. Thus, the inventory at the end of a year consists of the goods most recently placed in inventory. FIFO is one method used to determine Cost of Goods Sold for a business. Examples that use this method would be those dealing in the hospitality or food retail business.

1. Enter the total number of units that you have on hand. 2. From the most recent purchase, November 22, enter the number of units purchased, 8. In some cases the number of units of the most recent purchase will be greater or equal to the total number of units on hand. In such a case, enter the total number of units on hand and do not complete step three below. 3. From the next most recent purchase, September 5, enter the number of units, 10, needed for the fifo units to equal the total number on hand, 18. Continue with the next invoice if needed. 4. Multiply the unit price of each appropriate purchase by the fifo units on hand to determine the fifo cost. 5. Add the individual costs to determine the fifo cost of the total number of units in ending inventory. Last in first out (LIFO) -is an inventory valuation method which assumes that the last items placed in inventory are the first sold during an accounting year. Thus, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business.

1. Enter the total number of units that you have on hand, 18. 2. Enter the number of units in beginning inventory, 10. In some cases the number of units of beginning inventory will be greater than or equal to the total number of units shown on hand. In such a case enter the total number of units on hand and do not complete steps 3 and 4 below. 3. From the earliest purchase, Febraury 16th, enter the number of units purchased, 6. 4. From the next earliest purchase, April 17th, enter the number of units,2, needed for the lifo units to equal the total number of units on hand, 18. 5. Multiply the unit price of the beginning inventory by the lifo units on hand to determine the lifo cost of the beginning inventory. Repeat this process for each appropriate purchase. 6. Add the lifo cost for the beginning inventory and each appropriate purchase to determine the lifo cost of the total number of units in ending inventory. **REMEMBER** In the lifo method, the latest purchase are assumed to be sold first. Therefor ending inventory consists of the units purchased the earliest and the earliest purchase invoices are used to determine the value of the ending inventory. Weighted Average Inventory - The weighted average method is used to assign the average cost of production to a product. Weighted average costing is commonly used in situations where: Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit. The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers. Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit.

1. Calculate the total cost of beginning inventory and each purchase, $1020.00. by multiplying the units by each unit price. 2. Calculate the weighted average price per unit, $20.40, by dividing the total cost $1020 by the number of units available, 50. 3. Calculate the cost of ending inventory, $367.20, by multiplying the weighted average rpice per unit, by the unit ending inventory, 18.

Determining the Cost of Merchandise Inventory Read pages 569-572 and answer the following questions. 1. When the FIFO Method is used, how is the cost of each kind of ending inventory merchandise inventory determined?

2. On what idea is the lifo method based?

3. In a period of rising prices, which inventory costing emthod gives the highest cost of merchandise sold?

4. Why should a business select one inventory costing method and usethat same method continuously for each fiscal period?

5. Define the following terms: FIFO

LIFO Weighted Average Inventory Costing Method

FIFO

LIFO

Weighted Average