Inventory Cost Flow Methods in Perpetual Inventory Systems

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Published on 1 Nov 2010
School
UTSC
Department
Financial Accounting
Course
MGAB01H3
Professor
Inventory Cost Flow Methods in Perpetual Inventory Systems
¾ All methods of cost flow can be used in the perpetual inventory system
FIFO
¾ The results under FIFO in a perpetual system are the same as in a periodic system.
Regardless of the system, the first costs in are the ones assigned to cost of goods sold
Average Cost
¾ This is called moving average cost method in perpetual inventory system
¾ The average cost is calculated in the same method, however it is calculated for every
purchase or sale of merchandise, thus, constantly changing the average
LIFO
¾ The results under LIFO in a perpetual system differ to the periodic system. Because
the perpetual system constantly updates the inventory after each transaction, the cost
of LIFO would be based at the exact moment when the inventory was sold, whereas
the periodic system would use the cost of LIFO at the very end of the accounting
period.
Estimating Inventories
¾ To save time from physically counting inventory, the gross profit method and the retail
inventory method can be used to estimate
Gross Profit method
¾ Net sales ± estimated gross profit = estimated cost of goods sold
¾ Cost of goods available for sale ± estimated cost of goods sold = estimated cost of
ending inventory
¾ The gross profit method is based on the assumption that the gross profit margin will
remain the same
Retail Inventory Method
¾ Goods available for sale at retail ± net sales = ending inventory at retail
¾ Goods available for sale at cost/goods available for sale at retail = cost to retail ratio
¾ Ending inventory at retail X cost to retail ratio = estimated cost of ending inventory
¾ The disadvantage of this method is that it is an averaging technique
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Document Summary

Inventory cost flow methods in perpetual inventory systems. All methods of cost flow can be used in the perpetual inventory system. The results under fifo in a perpetual system are the same as in a periodic system. Regardless of the system, the first costs in are the ones assigned to cost of goods sold. This is called moving average cost method in perpetual inventory system. The average cost is calculated in the same method, however it is calculated for every purchase or sale of merchandise, thus, constantly changing the average. The results under lifo in a perpetual system differ to the periodic system. To save time from physically counting inventory, the gross profit method and the retail inventory method can be used to estimate. Net sales  estimated gross profit = estimated cost of goods sold. Cost of goods available for sale  estimated cost of goods sold = estimated cost of ending inventory.