Page 252 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes cost of materials will be low. But in the case of rising prices, if this method is adopted, the charge
to production will be low as compared to the replacement cost of materials. Consequently, it
would be difficult to purchase the same quantity of materials (as in the current period) in future
without having additional capital resources.
In the above illustration, with a beginning inventory of 180 and total purchases of 357 during
July, total cost of goods available for sale is 537. The physical inventory shows 20 units
remaining on hand. With FIFO valuation we consider 20 units consist of the latest units acquired.
The ending inventory will be as follows:

10 units from July 30 purchases (last purchases) @ 12 120
10 units from July 25 purchases (2nd last purchases) @ 11 110
230

Cost of goods sold of 307 will be computed as follows:
Goods available for sale 537
Less end inventory 230
Cost of goods sold 307

LIFO (Last In, First Out)

Under this method (as the name suggests), the assumption is that the items of the last batch (lot)
purchased are the first to be issued. Therefore, under this method, the price of the last batch (lot)
is used for pricing the issues, until it is exhausted and so on. If, however, the quantity of the issue
is more than the quantity of the latest lot than earlier (lot) and its price will be taken into
consideration. For valuation of month end inventory, 20 units are assumed to be the earliest
units acquired. It will consist of the balance at the beginning and the part of the 1st units
purchased during the month as below:

18 units from the beginning balance @ 10 units 180
2 units from July 11 purchases @ 10.50 21
201
Cost of goods sold is 336 in this case
Goods available for sale 537

Less end inventory 201
Cost of goods sold 336

Weighted Average

The weighted average cost of the inventory available in July is obtained by dividing the total
cost of inventory, including the beginning balance and July purchase, by the total units available
for sale.

Cost of goods available for sale
= 10.74
No. of units available for sale
Cost of ending inventory is 214.80 calculated as:
20 units × 10.74 = 214.80

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