ITFT - COST ACCOUNTING
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ITFT - COST ACCOUNTING

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Inventory control

Inventory control

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ITFT - COST ACCOUNTING Presentation Transcript

  • 1. Inventories
  • 2. Why is Inventory Control Important? Inventory is a significant asset and for many companies the largest asset. Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statements. Inventory must be protected from external risks ( such as fire and theft) and internal fraud by employees.
  • 3. Receiving report Purchase order Invoice AGREE JOURNAL Description Nov. 9 Post. Ref. Date Inventory 1 222 00 Accounts Payable--XYZ Co. 1 222 00 Purchased merchandise on account.
  • 4. LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Effect of Inventory Errors on Financial Statements Merchandise Inventory Cost of Merchandise Sold If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . overstated understated overstated overstated Net Income
  • 5. If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . understated overstated understated understated Effect of Inventory Errors on Financial Statements
  • 6. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 7. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 8. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 9. Inventory Costing Methods 40% 30% 20% 10% 0% 43% 34% 19% 4% Fifo Lifo Average Other
  • 10. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22
  • 11. FIFO ( Cost Accounting) • FIFO is most useable technique of valuation of material issue in manufacturing and trading industries. • It means First in, First Out. • We will send that material for production first which we bought first. • We also record the cost of issue on this basis.
  • 12. • Closing stock's value in store will be the purchase value of material which we purchased at the end. • This system of valuation of cost is very useful where there is the trend of decreasing prices, because we will charge high cost to the units which we bought earlier to new. • But this method is not useful in the trend of increasing prices.
  • 13. Merits of FIFO Method • This method is very logical because material should be issued first which we bought first. • Because we issue the material at its purchase price, so closing stock can be calculated correctly. • Closing stock's cost automatically shows the market price.
  • 14. Demerits of FIFO Method • In case, there is fluctuation in prices, we can not calculate correct cost of material issued. • We also can not compare on job's cost with other job's cost in case prices are fluctuating. • This is not good method in inflation.
  • 15. Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.
  • 16. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 FIFO Perpetual Inventory Account On January 4, 7 units of Item 127B are sold at $30 each.
  • 17. Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost The sale of 7 units leaves a balance of 3 units. Jan. 1 10 20 200 4 7 20 140 3 20 60 Jan. 1 10 20 200 On January 4, 7 units of Item 127B are sold at $30 each.
  • 18. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 FIFO Perpetual Inventory Account On January 10, the firm purchased eight units at $21 each.
  • 19. Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 10, the firm purchased eight units at $21 each. Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately.
  • 20. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 FIFO Perpetual Inventory Account On January 22, the firm sold four units for $31 each.
  • 21. Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 FIFO Perpetual Inventory Account 22 3 20 60 1 21 21 7 21 147 Of the four units sold, three are from the first units in (fifo) at a cost of $20. On January 22, the firm sold four units for $31 each.
  • 22. FIFO Perpetual Inventory Account On January 28, the firm sold two units at $32. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22
  • 23. Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 FIFO Perpetual Inventory Account 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105 On January 28, the firm sold two units at $32.
  • 24. FIFO Perpetual Inventory Account On January 30, purchased ten additional units of Item 127B at $22 each. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22
  • 25. Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 FIFO Perpetual Inventory Account 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105 30 10 22 220 5 21 105 10 22 220 Totals 18 $388 13 $263 15 $325 On January 30, purchased ten additional units of Item 127B at $22 each.
  • 26. What is LIFO • In this method of valuation of inventory, we calculate the inventory issue cost by reverse order. • It means that we charge old quantities price first for issue of material and then new prices will be charged. • It is just opposite of FIFO. It is most suitable in inflation of prices.
  • 27. • In other words, LIFO is last-in, first-out, meaning that the most recently purchased items are recorded as issued for production first from store. • If LIFO is used for calculating the cost of goods sold and closing stock, then it will calculated for calculating correct gross and net profit. • At that time, we take last (latest) purchase price for sold material first time.
  • 28. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.
  • 29. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 On January 4, the firm sold 7 units at $30 each.
  • 30. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 10, the firm purchased eight units at $21 each. Note that a new layer is formed.
  • 31. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 22, the firm sells four units at $31 each. 22 4 21 84 3 20 60 4 21 84 Of the 4 units sold, all come from the most recent purchase at a cost of $21 each.
  • 32. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 28, sold two units at $32 each. 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42
  • 33. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 30, purchase 10 units at $22 each. 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 30 10 22 220 3 20 60 2 21 42 10 22 220
  • 34. Item 127B LIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 30 10 22 220 3 20 60 2 21 42 10 22 220 Totals 18 $388 13 $266 15 $322
  • 35. Fifo Periodic
  • 36. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Fifo Periodic
  • 37. Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year $10,400 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 Cost of merchandise available for sale
  • 38. Fifo Periodic A physical count on December 31 reveals that 700 of the 1,000 units have been sold. Using fifo, the first units purchased are theoretically the first units sold. We begin the count with January 1.
  • 39. Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year $10,400 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 Sold these 200 Sold these 300 Sold 200 of these200 units @ $11 = $ 0 Jan. 1 = 0 Mar. 10 = 2,200 Sept. 21 $ 3,400 Ending inventory
  • 40. Cost of merchandise available for sale $10,400 Less ending inventory 3,400 Cost of merchandise sold $ 7,000 Fifo Periodic
  • 41. Jan. 1 200 units at $9 Summary of Fifo Periodic Mar. 10 300 units at $10 Sep. 21 400 units at $11 Nov. 18 100 units at $12 $1,800 $3,000 $4,400 $1,200 Purchases Merchandise Available for Sale $1,800 $3,000 $2,200 Cost of Merchandise Sold 200 units at $9 $10,400 $2,200 $1,200 $7,000 Merchandise Inventory $3,400 300 units at $10 200 units at $11 200 units at $11 100 units at $12 1,000 units 700 units 300 units
  • 42. Lifo Periodic
  • 43. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Using lifo, the most recent batch purchased is considered the first batch of merchandise sold.
  • 44. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Assume again that 700 units were sold during the year.
  • 45. 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year Lifo Periodic Sold these 100 Sold these 400 Sold 200 of these100 units @ $10 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 $10,400 0 0 1,000 Ending Inventory $2,800
  • 46. Cost of merchandise available for sale $10,400 Less ending inventory 2,800 Cost of merchandise sold $ 7,600 Lifo Periodic
  • 47. Jan. 1 200 units at $9 Summary of Lifo Periodic Mar. 10 300 units at $10 Sep. 21 400 units at $11 Nov. 18 100 units at $12 $1,800 $3,000 $4,400 $1,200 $1,800 $1,000 Cost of Merchandise Sold 200 units at $9 $10,400 $4,400 $1,200 $2,800 $7,600 100 units at $10 200 units at $10 400 units at $11 100 units at $12 $2,000 700 units 1,000 units 300 units Purchases Merchandise Available for Sale $1,800 Cost of Merchandise Sold
  • 48. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year The average cost periodic method is based on the average cost of identical units. Average Cost Periodic
  • 49. Average Cost Periodic 200 units @ $9 = $ 1,800 1,000 units available for sale during year 300 units @ $10 = $ 3,000 400 units @ $11 = $ 4,400 100 units @ $11 = $ 1,200 $10,400 Cost of merchandise available for sale
  • 50. Cost of Merchandise Available for Sale Units Available for Sale During Year = Average Unit Cost $10,400 1,000 Units = $10.40 per Unit Average Cost Periodic
  • 51. Cost of merchandise available for sale $10,400 Less ending inventory ($10.40 x 300) 3,120 Cost of merchandise sold $ 7,280 To verify this amount, multiply 700 units sold times $10.40 to get the same $7,280. Average Cost Periodic
  • 52. $ 3,800 2,700 4,650 3,920 Total $15,520 $15,472 $15,070 Valuation of Inventory at Lower-of-Cost-or-Market A 400 $10.25 $ 9.50 $ 4,100 $ 3,800 B 120 22.50 24.10 2,700 2,892 C 600 8.00 7.75 4,800 4,650 D 280 14.00 14.75 3,920 4,130 Unit Unit Inventory Cost Market Total Total Lower Item Quantity Price Price Cost Market C or M The market decline based on individual items ($15,520 – $15,070) = $450
  • 53. Assets Current assets: Cash $ 19 400 00 Accounts receivable $80 000 00 Less allowance for doubtful accounts 3 000 00 77 000 00 Merchandise inventory at lower of cost (first-in, first-out method) or market 216 300 00 Metro-Arts Balance Sheet December 31, 2007 Presentation of Merchandise Inventory on the Balance Sheet
  • 54. The End