- Period cost
- Costs that are expensed in the period incurred
- Including
- Abnormal waste of materials, labor, overhead
- Storage costs
- Administrative overhead
- Selling costs
Notes
- Rebate
- An amount paid by way of reduction, return, or refund on what has already been paid or contributed.
- Trade discounts
- discount which is referred to as, discount given by the seller to the buyer at the time of purchase of goods
Some assumptions and precondition
- Cost of purchasing or producing inventory will change over time
- The firm must employ the same cost flow method for inventories
Cost flow methods (2-1) to allocate inventory cost to income statement and balance sheet
- Specific identification (3)
- Each unit sold is matched with unit actual cost
- First in, first out (4)
- First item purchase is assumed to be the first item sold
- Based on earliest purchase cost
- Weighted average cost (5)
- Simple and objective
- Cost per unit of inventory = total cost of goods available for sale/total quantity available for sale
- COGS = average cost per unit * number of units sold
- Ending inventory = average cost per unit * number of units
- Value between those produced by FIFO and LIFO
- LIFO (6)
- is allowed under US GAAP but not allowed under IFRS
- Item purchase most recently is assumed to be the first item
- In an inflationary environment, LIFO COGS > FIFO COGS → earning lower → lower income taxes
Account for changes in inventory using:
- Periodic inventory system (7)
- Inventory values and COGS are determined at the end of the accounting period
- No detailed records of inventory
- Inventory acquired during the period is reported in Purchase account (9)
- End of period:
- Cost of goods available for sale (10) = beginning inventory + Purchase
- COGS = goods available for sale – ending inventory
- Perpetual inventory system (8)
- Inventory values and COGS are updated continuously
- Inventory purchase/sold is recorded directly in inventory when the transaction occurs
- Purchase account is not necessary
| Perpetual | Periodic | |
| FIFO | Ending inventory and COGS are the same | |
| LIFO | Affected by order of purchase | Not consider to order of purchase |
COGS calculation with stable or increasing inventory quantities
- FIFO COGS < LIFO COGS as cost of the last unit purchased is larger than the cost of the first goods purchased due to inflation.
Ending inventory with stable or increasing inventory quantities
- LIFO ending inventory < FIFO ending inventory
Ending inventory (11)
- When prices are rising or falling,
- FIFO provides the most useful measure of ending inventory
- LIFO is based on older costs that may differ significantly from current economic value
COGS
- Change price generate significant difference between COGS under LIFO and FIFO
Gross profit
- Gross profit = revenue – COGS → gross profit is affected by the choice of cost flow method
