Inventory Costing

Inventory valuation

After the companies to determine the number of units of inventory, which are the costs for amounts to calculate the total cost of inventory and cost of goods sold. If companies can particularly identify specific units sold and still in the final inventory, can enter the specific identification method of inventory costs. This method allows companies to accurately determine the inventory of fine and cost of goods sold. It requires companies to record the original purchase price of each item in stock. Traditionally, specific identification was used to keep records of products used as cars, pianos and other costly articles of the time of purchase similar to the time of sale, as now, the codes bar. This practice is now rare in most businesses in the recruitment of the development costs.

Cost flow assumptions other than the specific recognition by the stream of costs, which can accept independent of the physical flow of goods. There are three methods considered, including (FIFO) (LIFO), and (average cost). Management usually selects the most appropriate flow costs.

The (FIFO) first in first out method presupposes the goods purchased are the first to be sold. It is often parallels the physical flow of goods. Then increase the cost of goods purchased first are the first to be recognized in determining the cost of goods sold. Closing stock was purchased at the price of the last unit. Companies get the cost of the unit cost of ending inventory by the recent purchase and forward until all units of inventory costs. For the administration, net income is the highest good. Thanks to users outside the company to seek more favorable. In addition, if the charges on the basis of the annual surplus will be higher. Therefore, if prices rise, companies tend to prefer using FIFO, because it results in a net increase. A major advantage of the FIFO method is that in a period of inflation, the cost of the final inventory is to approximate the current cost associated.

L '(LIFO) last method involves first the last goods purchased are the first to be sold. LIFO is not with the physical flow of inventory. The cost of goods purchased last are the first to be recognized in the determination of goods sold. Closing stock was purchased for the old unit. Companies get the cost of ending inventory at a cost of the first property for sale and work until all units of inventory costs.

The average cost method allocates the costs incurred for the sale of goods based on the weighted average unit cost, it is also assumed that the goods are of a similar nature. The company is the weighted average unit cost for the units available to determine the cost of ending inventory. You can check the cost of ownership in this process by multiplying the units by the weighted average unit cost will be sold.

Each of the method of cost flow assumption three is acceptable for use. 44% of large U.S. companies using the FIFO method. These include companies such as Reebok International Ltd. and International Wendy. 33% say they use the LIFO method, including companies such as Campbell Soup Company, Kroger and Walgreen Drug. 19% depending on the average cost method, including Starbucks and Motorola. Some companies use more than one. Black & Decker Manufacturing Company for domestic use LIFO and FIFO inventory for equities. The reason companies use different methods of taking inventory costs flow are varied, but are usually based on three factors. First, the profit and loss, the second effect of accounting implications, and finally, the tax consequences.

It's the cost method of flow of a company chooses, they must constantly be anything other than an accounting rule. This approach is often called the principle of coherence, which means that the company uses the same accounting policies and methods from year to year. Consistency improves the comparability of financial statements for periods of time. With the FIFO and LIFO next one year, it would be difficult to compare the net income of two years.