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Classic

Accounting

Inventory

Introduction

Article 12 of Commercial Code:

 Goods Aquired = purchase cost + incidental purchase cost (commission)

 Goods Produced = production cost


When quantities were acquired in different periods, we have two ways to determine price of the output:
    - Average
    - Oldest Acquisition Price (First in First Out - FIFO)


Inventory Class Explanation Image Inventory Class Explanation Image

Average

THIS METHOD SHOULD BE USED AT THE END OF THE YEAR

Weighted cost

The first step is to calculate the weighted cost of all input/acquisition goods.

Weighted Cost=Quantity×Unit Cost\text{Weighted Cost} = \text{Quantity} \times \text{Unit Cost}

Sum of weighted cost

Add all weighted cost.

Total Input Quantity

Calculate the quantity of all inputs goods by adding all quantites of input/acquisition.

Weighted Average

Calculate the weighted average cost.

Average=Sum of weighted costTotal Quantity\text{Average} = \frac{\text{Sum of weighted cost}}{\text{Total Quantity}}

Consumption

Find the consumption cost.

Consumption Cost=Quantity Consumed×Weighted Average\text{Consumption Cost} = \text{Quantity Consumed} \times \text{Weighted Average}

Final Stock Value

Determine the final stock value

Final Stock Value=(Total Quantity−Consumed quantity)×Weighted Average\text{Final Stock Value} = (\text{Total Quantity} - \text{Consumed quantity}) \times \text{Weighted Average}

FIFO

THIS METHOD SHOULD BE USED FOR EACH EXIT TRANSACTION

Inputs Used

The first step is to determine which and how many input goods are consumed.

Weighted cost

Calculate the weighted cost of consumed goods

Weighted Cost=Quantity×Unit Cost\text{Weighted Cost} = \text{Quantity} \times \text{Unit Cost}

Consumption

Add all the weighted cost of consumed goods

Final Stock Value

The final stock value is the sum of weighted unit cost of the remaining (not used) goods.

Example 1

DateMovementQuantitiesUnit of cost of acquisition
JanuaryPurchase2000.40
FebruaryPurchase10000.36
JunePurchase7500.33
AugustPurchase6000.38
SeptemberPurchase4000.36
NovemberConsumption2500???

Purchase = input

Consumption = output

Average

Step 1: Weighted Cost

Average Method Example 1 Image Average Method Example 1 Image

Weighted cost are calculated in the specific column.

200×$0.40=$80200 \times \$0.40 = \$80


1000×$0.36=$3601000 \times \$0.36 = \$360


750×$0.33=$247.5750 \times \$0.33 = \$247.5


600×$038=$228600 \times \$038 = \$228


400×$0.36=$144400 \times \$0.36 = \$144


Step 2: Sum of Weighted Cost

We add all weighted cost.

Sum=$80+$360+$247.5+$228+$144=$1059.5\text{Sum} = \$80 + \$360 + \$247.5 + \$228 + \$144 = \$1059.5


Step 3: Total Quantity

We calculate the total acquired/input goods.

Total Quantity=200+1000+750+600+400=2950\text{Total Quantity} = 200 + 1000 + 750 + 600 + 400 = 2950

Step 4: Average Weighted Cost

We find the average with the average formula

Average=Sum of weighted costTotal Quantity=1059,52950=$0.359=$0.36\text{Average} = \frac{\text{Sum of weighted cost}}{\text{Total Quantity}} = \frac{\text{1059,5}}{\text{2950}} = \$0.359 = \$0.36

Step 5: Consumption

Now that we have average weighted unit price, we can find the consumption.

Consumption Cost=Quantity Consumed×Weighted Average=2500×$0.36=$900\text{Consumption Cost} = \text{Quantity Consumed} \times \text{Weighted Average} = 2500 \times \$0.36 = \$900

Step 6: Final Stock Value

The final stock value can thus be calculated:

Final Stock Value=(Total Quantity−Consumed quantity)×Weighted Average=(2950−2500)×$0.36=$162\text{Final Stock Value} \\\\ = (\text{Total Quantity} - \text{Consumed quantity}) \times \text{Weighted Average} \\\\ = (2950 - 2500) \times \$0.36 \\\\= \$162

FIFO

Step 1: Inputs used

FIFO Method Example 1 Image FIFO Method Example 1 Image

From the table we can see that we use everything from January, everything from February, everything from June and 550 from August.

Step 2: Weighted Cost

We calculate the weighted cost for the used goods.

200×$0.40=80200 \times \$0.40 = 80


1000×$0.36=$3601000 \times \$0.36 = \$360


750×$0.33=$247,5750 \times \$0.33 = \$247,5


550×$0.38=$209550 \times \$0.38 = \$209


Step 3: Consumption

We, then, add all the weighted cost to have the consumption cost:

Consumption=$80+$360+$247.5+$209=$896.5\text{Consumption} = \$80 + \$360 + \$247.5 + \$209 = \$896.5


Step 4: Final Stock Value

The remaining goods are:

FIFO Method Example 1 Remaining Image FIFO Method Example 1 Remaining Image

Weighted costs of remaining stock:

50×$0.38=$1950 \times \$0.38 = \$19


400×$0.36=$144400 \times \$0.36 = \$144


We add them up:

Final Stock Value=$19+$144=$163\text{Final Stock Value} = \$19 + \$144 = \$163

Comparison

    - Average


         - Consumption: $900


         - Final Stock Value:$162


    - FIFO


         - Consumption: $856.5
         - Final Stock Value: $163

Example 2

DateDescriptionQuantityUnit Price
1 SeptemberInitial stock50$1,800
5 SeptemberExit voucher n.S45130???
7 SeptemberEntry voucher n.E920140$1,950
8 SeptemberExit voucher n.S45240???
15 SeptemberExit voucher n.S45354???
17 SeptemberEntry voucher n.E92132$1,860
21 SeptemberEntry voucher n.E92248$1,435
26 SeptemberExit voucher n.S454120???

Average

Step 1: Weighted Cost

We calculate the weighted cost for all acquired goods (all entry vouchers).

50×$1,800=$9050 \times \$1,800 = \$90


140×$1,950=$273,000140 \times \$1,950 = \$273,000


32×$1,860=$59,52032 \times \$1,860 = \$59,520


48×$1,435=$68,88048 \times \$1,435 = \$68,880

Step 2: Sum of Weighted Cost

We add all the weighted cost to have the sum of weighted cost.

Sum of Weighted Cost=$90+$273,000+$59,520+$68,880=$491,400\text{Sum of Weighted Cost} = \$90 + \$273,000 + \$59,520 + \$68,880 = \$491,400

Step 3: Total Quantity

We add all the acquired quantities to have the total quantity.

Total Quantity=50+140+32+48=270\text{Total Quantity} = 50 + 140 + 32 + 48 = 270

Step 4: Average Weighted Cost

We divide the sum of weighted cost by the total quantity to have the average weighted cost.

Average Weighted Cost=491,400270=$1,820\text{Average Weighted Cost} = \frac{491,400}{270} = \$1,820

Step 5: Consumption

We calculate the consumption cost.

Total quality consumed is the sum of all exit quantities.

Quantity consumed=30+40+54+120=244\text{Quantity consumed} = 30 + 40 + 54 + 120 = 244


Consumption=244×$1,820=$444,680\text{Consumption} = 244 \times \$1,820 = \$444,680

Step 6: Final Stock Value

We calculate the final stock value.

Remaining quantity=270−244=26\text{Remaining quantity} = 270 - 244 = 26


Final Stock Value=26×$1,820=$47,320\text{Final Stock Value} = 26 \times \$1,820 = \$47,320

Average Example 2 Image Average Example 2 Image

FIFO

FIFO Example 2 Image FIFO Example 2 Image

Step 1: Consumption

We calculate the consumption cost.

Consumption=$54,000+$36,000+$39,000+$105,300+$128,700+$59,520+$31,570=$454,090\text{Consumption}\\\\ = \$54,000 + \$36,000 + \$39,000 + \$105,300 + \$128,700 + \$59,520 + \$31,570 \\\\ = \$454,090

Step 2: Final Stock Value

We calculate the final stock value.

Final Stock Value=26×$1,435=$37,310\text{Final Stock Value}\\\\ = 26 \times \$1,435 = \$37,310

Comparison

    - Average


         - Consumption: $444,680


         - Final Stock Value:$47,320


    - FIFO


         - Consumption: $454,090
         - Final Stock Value: $37,310

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IntroductionAverageWeighted costSum of weighted costTotal Input QuantityWeighted AverageConsumptionFinal Stock ValueFIFOInputs UsedWeighted costConsumptionFinal Stock ValueExample 1AverageStep 1: Weighted CostStep 2: Sum of Weighted CostStep 3: Total QuantityStep 4: Average Weighted CostStep 5: ConsumptionStep 6: Final Stock ValueFIFOStep 1: Inputs usedStep 2: Weighted CostStep 3: ConsumptionStep 4: Final Stock ValueComparisonExample 2AverageStep 1: Weighted CostStep 2: Sum of Weighted CostStep 3: Total QuantityStep 4: Average Weighted CostStep 5: ConsumptionStep 6: Final Stock ValueFIFOStep 1: ConsumptionStep 2: Final Stock ValueComparison