Lecture Notes: Inventory Costing Methods in Perpetual Inventory Systems

Introduction

• Focus on merchandise inventory costs under a perpetual inventory system.
• Part 1 covered:
  • Specific identification method
  • First-in, first-out (FIFO) method
• Part 2 covers:
  • Last-in, first-out (LIFO) method
  • Weighted-average method

Last-In, First-Out (LIFO) Method

• Concept: Last costs into inventory are the first out to cost of goods sold.
  • Oldest costs remain in ending inventory.
• Example:
  • Purchases:
    • Jan 1: 3 tablets @ $300 each
    • Jan 15: 3 tablets @ $310 each
    • Feb 8: 3 tablets @ $320 each
  • Feb 25: Sold 3 tablets; last purchased assumed to be sold first.
  • Financial Effects:
    • Merchandise inventory valued at $1,830
    • Cost of goods sold = $960

Detailed Example (August Transactions)

• Starting Inventory: 2 units @ $350 each ($700 total)
• Purchases:
  • Aug 5: 4 units @ $360 each ($1,440 total)
• Sales:
  • Aug 15: Sold 4 units; assume last purchased on Aug 5 sold first.
  • Inventory Cost = $700
  • Aug 26: Purchase of 12 tablets @ $380 each ($4,560 total)
  • Current Inventory Cost = $5,260
  • Aug 31: Sold 10 tablets; assume last purchased tablets sold first.

Financial Summary for August

• Total purchases: 16 tablets ($6,000)
• Sales: 14 tablets ($5,240 cost)
• Ending Inventory: 4 units ($1,460)
• Balance Sheet & Income Statement:
  • Ending inventory: 2 units @ $350, 2 units @ $380 ($1,460 total)
  • COGS: 4 units @ $360 + 10 units @ $380 = $5,240
  • Total cost of goods available for sale: $6,700

Weighted-Average Method

• Concept: Inventory cost is based on the weighted-average cost per unit after each purchase.
• Calculation:
  • Cost of goods available for sale / number of units available
• Example:
  • Aug 5: 4 units @ $360
    • New avg cost: $356.67
  • Aug 15: Sold 4 units
    • COGS: $1,427
  • Remaining inventory valued at $713
  • Aug 26: Purchase 12 tablets @ $380
    • New avg cost: $376.64
  • Aug 31: Sold 10 units
    • COGS: $3,766

Financial Summary for August

• Purchases: $6,000
• COGS: $5,193
• Inventory on hand: $1,507
• Balance Sheet & COGS:
  • Ending inventory: 4 units
  • Total cost of goods available for sale: $6,700

Journal Entries

• Similar initial entries under FIFO, LIFO, and Weighted-Average methods
• Differences in final entry:
  • LIFO: Last purchased goods assumed first out
  • Weighted-Average: Uses weighted-average cost per unit for COGS

Conclusion

• Overview of LIFO and Weighted-Average methods
• Application to Smart Touch Learning's inventory system
• Emphasized understanding of differences among inventory costing methods