Question 3.14: Modifying our earlier example as follows, let us recalculate...
Modifying our earlier example as follows, let us recalculate the inventory and cost of sales figures:
| Tonnes | Cost per tonne | ||
| May 1 | Opening stock/inventory | 1,000 | $10 |
| 2 | Purchased | 5,000 | $11 |
| 3 | Sold | 4,000 | |
| 4 | Purchased | 8,000 | $12 |
| 6 | Sold | 5,000 | |
| Closing stock/inventory | 5,000 | ||
First in, first out
This will be the same irrespective of when the sales are made, as shown below.
Detailed records can be kept as described here. The opening balance provides a starting point. To this can be added any new purchases of stock:
1 May Opening balance 1,000 tonnes at $10 = $10,000
2 May Purchased 5,000 tonnes at $11 = $55,000
So total inventory at this stage equals:
1,000 tonnes at $10 = $10,000 plus
5,000 tonnes at $11 = $55,000
3 May Sold 4,000 tonnes
A reduction would be made reflecting the cost of sales (using FIFO) on this date:
1,000 tonnes at $10 = $10,000 plus
3,000 tonnes at $11 = $33,000
The cost of this particular set of sales would be $43,000, while the remaining inventory on this date would be:
2,000 tonnes at $11 = $22,000
4 May Purchased 8,000 tonnes at $12 = $96,000.
So total inventory on this date equals:
2,000 tonnes at $11 = $22,000 plus~norn~
8,000 tonnes at $12 = $96,000
6 May Sold 5,000 tonnes
A reduction would be made reflecting the cost of sales (using FIFO) on this date:
2,000 tonnes at $11 = $22,000 plus
3,000 tonnes at $12 = $36,000
The cost of this particular set of sales would be $58,000, while the remaining inventory on this date would be:
5,000 tonnes at $12 = $60,000
The perpetual inventory method would give us a total cost of sales figure of $43,000 + $58,000 = $101,000, which is the same as using the FIFO method (see page 121). The closing inventory is $60,000.
Last in, first out
Use of the perpetual inventory method and LIFO will often produce figures that differ from those calculated under the earlier system. Using the same example, we find the following
1 May Opening balance 1,000 tonnes at $10 = $10,000%}
2 May Purchased 5,000 tonnes at $11 = $55,000%}
So total inventory at this stage equals:
1,000 tonnes at $10 = $10,000 plus
5,000 tonnes at $11 = $65,000
3 May Sold 4,000 tonnes
A reduction would be made reflecting the cost of sales (using LIFO) on this date:
4,000 tonnes at $11 = $44,000
The cost of this particular set of sales would be $44,000, while the remaining inventory on this date would be:
1,000 tonnes at $10 = $10,000 plus
1,000 tonnes at $11 = $11,000
4 May Purchased 8,000 tonnes at $12 = $96,000.
So total inventory on this date equals:
1,000 tonnes at $10 = $10,000 plus
1,000 tonnes at $11 = $11,000 plus
8,000 tonnes at $12 = $96,000
6 May Sold 5,000 tonnes
A reduction would be made reflecting the cost of sales (using LIFO ) on this date:
5,000 tonnes at $12 = $60,000
The cost of this particular set of sales would be $60,000, while the remaining inventory on this date would be:
1,000 tonnes at $10 = $10,000 plus
1,000 tonnes at $11 = $11,000 plus
3,000 tonnes at $12 = $36,000
The net effect of this method is to show cost of sales as $44,000 + $60,000 = $104,000, and closing stock as $57,000.
Average cost
When using this approach, you will adjust the average price each time there is a purchase. In the same example we find the following:
| May 1 | Opening balance | 1,000 tonnes at $10 | = $10,000 |
| May 2 | Purchased | 5,000 tonnes at $11 | = $55,000 |
| Balance equals | 6,000 tonnes at $10.8333 | = $65,000 | |
| May 3 | Cost of sales | 4,000 tonnes at $10.8333 | = $43,333 |
| Inventory balance | 2,000 tonnes at $10.8333 | = $21,667 | |
| May 4 | Purchased | 8,000 tonnes at $12 | = $96,000 |
| Inventory balance | 10,000 tonnes at $11.7667 | = $117,667 | |
| May 6 | Cost of sales | 5,000 tonnes at $11.7667 | = $58,833 |
| Inventory balance | 5,000 tonnes at $11.7667 | = $58,833 |
The net effect of this method is to show cost of sales as $43,333 + $58,833 = $102,166, and closing stock as $58,833.