INVENTORIES Trade Discounts, rebates and other similar
items are deducted in determining the cost of
Inventories are assets held for sale in the purchase.
ordinary course of business, in the process of
production for such sale or in the form of Cost of Conversion
materials or supplies to be consumed in the
production process or in the rendering of the cost of conversion of inventories includes
services. cost directly related to the units of production
it encompass goods purchased and held for such as direct labor.
resale for example: It also includes a systematic allocation of fixed
It is generally classified as current assets. and variable production overhead that is
incurred in converting materials into finished
goods
TYPES OF BUISNESS AND THEIR INVENTORY Fixed Production
is the indirect cost of production that remains
Trading Concern relatively constant regardless of the volume of
is one that buys and sells goods in the same form production. Examples are depreciation and
purchased. The term “merchandising inventory” is maintenance of factory building and equipment,
generally applied to goods held by a trading concern. and the cost of factory management and
administration.
Variable Production
Manufacturing Concern is the indirect cost of production that varies directly
with the volume of production. Examples are
is one that buys goods which are altered or converted
indirect labor and indirect materials.
into another form before they are made available sale.
Other Cost
is included in the cost of inventories only to the extent
ITEMS INCLUDED IN INVENTORY
that is incurred in bringing the inventories to their
1. Goods owned and on hand present location and condition.
2. Goods in transit and sold FOB Destination
Excluded from Cost Of Inventory
3. Goods in transit and purchased FOB shipping
point. Abnormal Amount of wasted material.
4. Goods out on congestion
5. Goods in the hand of salesmen or agents Storage Cost, unless necessary in the production
6. Goods held by costumers on approval or on process prior to a further production stage. Thus,
trial storage cost on goods in the process is capitalized but
storage cost on finished goods are expensed.
Administrative Overhead
ACCOUNTING FOR INVENTORIES (INVENTORY
SYSTEMS) Distribution and Selling cost
Periodic inventory system
calls for physical counting of goods on hand Cost Formulas
aat the end of the accounting period to Per PAS2, the value of the inventory can be
determine quantities. determined using the following cost formulas
Perpetual Inventory System FIFO (Fist in, First out)
Requires the maintenance of records called Weighted Average
“Stock Cards” that usually offers a running LIFO (Last in, First out)
summary of the inventory inflow and outflow. Specific Identification
INVENTORY COSTS
Cost of Purchase FIFO (FIRST IN, FIRST OUT)
the cost of purchase of inventories comprises Assumes that the goods first purchased are first sold.
the purchase price, import duties and Inventory is expressed in recent and new prices. Cost
irrevocable taxes, freight, handling and other of Goods Sold is representative of earlier or old
costs directly attributable to the acquisition of prices.
finished goods and materials.
Favors statement of financial position since inventory
is stated at current replacement cost.
The objection is improper matching of cost against
revenue since goods sold are stated at earlier or older
prices resulting in understatement of COGS.
In the period of inflation or rising prices, the FIFO
method would result to the highest income.
In the period of deflation or declining prices, the FIFO
method would result to the lowest test income.
WEGHTED AVERAGE (PERPETUAL OR MOVING
AVERAGE METHOD)
New weighted average cost per unit is computed after
every purchase and purchase return.
WAC/unit = GAS (Peso)/ GAS (units)
Cost of Inventory = WAC/unit x total number of
inventory on hand
ADVANTAGE
Relatively easy to apply and produces inventory
valuation that approximates current value if there is a
rapid turnover of inventory
Disadvantage
There may be considerable lag between the current
coat and inventory valuation since the average unit
cost involves early purchases
When prices are rising the inventory valuation will be
less than the current cost. When prices are declining
the inventory will be more than the cost.
SPECIFIC IDENTIFICATION
Advantage
flow of the inventory cost corresponds with the actual
physical flow of goods. Hence, there is actual
determination of cost of units sold on hand.
Disadvantage
Very costly to implement.
