Page 255 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 11: Inventory Management

Notes

Did u know? The primary advantage of LIFO is that current costs are matched with current
revenues. Consequently LIFO has definite tax advantage during periods of rising prices.

Average Cost/Moving Average

An average cost perpetual inventory system requires computing a new average cost each time
additional inventory is purchased. This moving average is a weighted average of the units in
hand after each acquisition. This is illustrated below. For example, the average cost of the units
in hand after the July 11 purchase included 10 units at 10 each and 10 units at 10.50 each. The
average cost is 10.25, calculated by dividing the total cost of 205 by 20 units.
The units removed from inventory are valued at the average cost at the time of sale or use. With
costs increasing over time the moving average cost also increases, but it always lags somewhat
behind the current cost of inventory. As usual, the average cost valuation falls somewhere
between FIFO and LIFO valuation.
Moving Average Perpetual Inventory Record of B Comapny Ltd.

Date Particulars Purchases Sales Balance
Unit Total Unit Total Unit Total
Units Cost Cost Units Cost Cost Units Cost Cost
July
1 Balance 18 10.00 180 18 10 180.00
3 Sold 8 units - - - 8 10.00 80.00 10 10 100.00
11 Bought 10 units 10 10.50 105 - - - 20 10.25 205.00
17 Sold 5 units - - 5 10.25 51.25 15 10.25 153.75
25 Bought 12 units 12 11.00 132 - - - 27 10.5833 285.75
28 Sold 17 units - - - 17 10.5833 179.92 10 10.5833 105.83
30 Bought 10 units 10 12.00 120 - - - 20 11.2915 225.83

!
Caution The moving average inventory costs are between FIFO and LIFO cost. In a perpetual
inventory system, a new average cost is computed every time, units are added to the
inventory, units transferred out of inventory are costed at the recent computed average
cost.

Self Assessment

Fill in the blanks:
10. …………..assigns the most recent cost to inventory and the oldest costs to cost of goods
sold.
11. ……………………assigns the most recent costs to cost of goods sold and oldest costs to
inventory.

12. ……………………..inventory system requires computing a new average cost each time
additional inventory is purchased.

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