Lesson 12 - Inventory Costing

  • Lesson 12 - Inventory Costing

    study goal
    1.Describe the steps in determining inventory quantities.
    2.Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination.


    • Lesson #12- Glossary

      Goods shipped FOB (Free On Board) shipping point belong to the buyer. The buyer is responsible for paying shipping costs and has legal title to the goods while in transit.

      Goods shipped FOB destination belong to the seller. Ownership passes to the buyer when they actually receive the goods.

      In some lines of business, it is customary to hold goods belonging to other parties and to sell them, for a fee, without ever taking ownership of the goods. These items are called consigned goods.

      The specific identification method tracks the actual physical flow (movement) of the goods in a perpetual inventory system.

      The FIFO cost flow assumption assumes that the earliest goods purchased are the first ones sold.

      The average cost formula assumes that it is not practical to measure a specific physical flow of inventory when the goods available for sale are homogeneous and non-distinguishable. The allocation of the cost of goods available for sale is based on weighted average unit cost.


    • Inventory Costing Lesson
      NOTE: Determining the ownership of the goods

         In some lines of business, it is customary to hold goods belonging to other parties and to sell them, for a fee, without ever taking ownership of the goods. These items are called consigned goods.

         The holder of the goods (consignee) does not own the goods.

         Ownership remains with the shipper of the goods (consignor) until the goods are sold to the customer.

         The consignee does not own the goods and therefore does not include the consigned goods in the inventory count.

        Examples of businesses that sell consigned goods are art galleries, craft stores, second-hand clothing stores, sporting goods stores and antique dealers.

       Other Situations

         Sometimes goods are not physically present at a company because they have been taken home on approval by a customer.  Since the customer will either return the item or decide to buy it, the inventory item should be added to the physical count.

        Goods that have been sold but are being held for alteration or until the goods can be delivered to the customer or picked up should not be included in the inventory because legal title to ownership has passed to the customer.