Page 296 - Accounting Principles (A Business Perspective)

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Purchased Sold Balance
Date Units Unit Total Units Unit Total Units Unit
Beg. inv. Cost Cost Cost Cost 10 Cost Total Cost
$8.00 80.00
Mar. 2 10 $8.50 $85 20 8.25 aA 165.00
Mar. 10 10 $8.25 B $82.50 10 8.25 82.80
May 28 20 8.40 168 30 8.35 b 250.50
July 14 20 8.35 167.00 10 8.35 83.50
Aug. 12 10 9.00 90 20 8.675 c 173.50
Sept. 7 10 8.675 86.75 10 8.675 86.75
Oct. 12 20 8.80 176 30 8.758 c 262.75
Nov. 22 8.758 175.17 10 8.758 87.58
Dec 21 10 9.10 91 20 $8.929 e $178.58 C

c
d
a $165.00/2 = $8.25. $250.50/30 = $8.35. $173.50/20 = $8.675. $262.75/30 = $8.758.
b
0 = $8.929 * rounding difference.
e $175.58/2
0
C
B
A A new unit cost is calculated after each purchase. The unit cost of sales is the most recently calculated cost. Balance
of $178.58 would agree with balance already existing in the Merchandise Inventory account.
Exhibit 59: Determining ending inventory under weighted-average method using perpetual inventory procedure
Look at Exhibit 58 and Exhibit 54, the flow of inventory costs under LIFO using both the perpetual and periodic
inventory procedures. Note that ending inventory and cost of goods sold are different under the two procedures.
Weighted-average under perpetual inventory procedure Under perpetual inventory procedure, firms
compute a new weighted-average unit cost after each purchase by dividing total cost of goods available for sale by
total units available for sale. The unit cost is a moving weighted-average because it changes after each purchase. In

Exhibit 59, you can see how to compute the moving weighted-average using perpetual inventory procedure. The
new weighted-average unit cost computed after each purchase is the unit cost for inventory items sold until a new
purchase is made. The unit cost of the 20 units in ending inventory is USD 8.929 for a total inventory cost of USD
178.58. Cost of goods sold under this procedure is USD 690 minus the USD 178.58, or USD 511.42.
Advantages and disadvantages of specific identification Companies that use the specific identification
method of inventory costing state their cost of goods sold and ending inventory at the actual cost of specific units
sold and on hand. Some accountants argue that this method provides the most precise matching of costs and
revenues and is, therefore, the most theoretically sound method. This statement is true for some one-of-a-kind
items, such as autos or real estate. For these items, use of any other method would seem illogical.

One disadvantage of the specific identification method is that it permits the manipulation of income. For
example, assume that a company bought three identical units of a given product at different prices. One unit cost
USD 2,000, the second cost USD 2,100, and the third cost USD 2,200. The company sold one unit for USD 2,800.
The units are alike, so the customer does not care which of the identical units the company ships. However, the
gross margin on the sale could be either USD 800, USD 700, or USD 600, depending on which unit the company
ships.
Advantages and disadvantages of FIFO The FIFO method has four major advantages: (1) it is easy to

apply, (2) the assumed flow of costs corresponds with the normal physical flow of goods, (3) no manipulation of

Accounting Principles: A Business Perspective 297 A Global Text