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Unit 11: Inventory Management

Cost of goods sold is 322.20 calculated as: Notes

30 units × 10.74 = 322.20

11.5.3 Valuation of Perpetual Inventories

In a perpetual inventory system, the inventory account contains a current record of all inventory
transactions. Such a system is particularly useful in a manufacturing firm, where a current
purchase cost data are vital. A perpetual inventory system allows the firm to charge inventory
costs to production as soon as inventory is used. Each receipt of raw materials and issue to
production (work in-progress) is recorded in the inventory account as the transactions occur.
The Inventory account is current, hence the name ‘perpetual’.

As in periodic system, purchases in a perpetual system are recorded at their cost. When raw
materials inventory is issued to production, its cost is transferred from the raw materials
inventory account to work-in-progress account. If the cost of raw materials change over time,
some cost flow assumption must be made. Perpetual system may be maintained using specific
identification FIFO, LIFO or moving average. The illustration given below, deals with
merchandise inventory, but the same principle can be followed for transfer of raw material to
WIP, transfer of WIP to finished goods and sale of finished goods.

Notes Specific Identification
Special identification requires an ability to follow the physical flow of each inventory
item and its cost from acquisition through use or sale. The method is appropriate when
each item of inventory can be separately identified and therefore has a cost that applies
only to that item. Specific identification is used with unique and costly items such as
jewelry, automobiles or custom made products (i.e., products as per customers’
specifications).

First In First Out (FIFO)

Inventory cost flow with perpetual FIFO is illustrated as below. The units remaining in inventory
are always assumed to be those purchased most recently. After the July 17 sale of five units, the
15 units remaining on hand consist of the most recent 10 units acquired on July 11 and five units
from the beginning balance. Similarly, the sale of 17 units on July 28 first exhausts five units
from the beginning balance, then 10 units acquired next on July 11, and finally two units purchased
most recently on July 25.
If one compares the perpetual FIFO ending inventory balance with the periodic FIFO ending
inventory balance, one can observe that two are identical. With FIFO valuation, periodic and
perpetual system both produces the same ending inventory cost.
FIFO Perpetual Inventory Record of B Comapny Ltd.

Date Explanation Purchases Sales Balance
Total Units Total Total
Units Units Cost Cost Units Cost Cost Units Cost
July Rs Rs Rs Rs Rs
1 Balance 18 10.00 180 18 180
3 Sold 8 units - - - 8 10.00 80 10 100
11 Bought 10 units 10 10.50 105 - - - 20 205
Contd...
17 Sold 5 units - - 5 10.00 50 15 155
25 Bought 12 units 12 11.00 132 - - - 27 287
28 Sold 17 units - - - 5 10.00 50 - -
LOVELY PROFESSIONAL UNIVERSITY 247
0 10 10.50 105 - -
0 2 11.00 22 10 110
30 Bought 10 units 10 12.00 120 - - - 20 230