Business Administration 2257 Chapter Notes -Dell, Weighted Arithmetic Mean, European Cooperation In Science And Technology
Course CodeBusiness Administration 2257
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CHAPTER 8 (PART II) – REPORTING AND INTERPRETING COST OF
GOODS SOLD AND INVENTORY
Three generally accepted inventory costing methods:
1. Specific identification
2. First-in, first-out (FIFO)
3. Weighted average
Specific identification method: Identifies the cost of the specific item was sold.
The choice of an inventory costing method is NOT based on the physical flow of
goods on and off the shelves.
FIFO: Assumes that the oldest units (the first costs in) are the first units sold, and the last
goods purchased are left in ending inventory.
Perpetual inventory system COGS calculated throughout accounting period.
Periodic inventory system COGS calculated once at end of accounting period.
Weighted-average cost method: Uses the weighted-average unit cost of the goods
available for sale for both cost of goods sold and ending inventory.
Number of monitors x unit cost = Total cost
Average cost = Cost of goods available for sale
Number of monitors available for sale
Called moving weighted-average cost method. See page 419 for example.
Three inventory costing methods differ only in the portion of goods available for sale
allocated to COGS versus ending inventory.
•When unit costs are rising, the weighted-average cost method produces lower income
and a lower inventory valuation than FIFO.
•When unit costs are declining, the weighted-average cost method produces higher
income and a higher inventory valuation than FIFO.
Net realizable value: The expected sales prices less selling costs (ex: repair and disposal
Replacement cost: The current purchase price for identical goods.
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