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MOVING INVENTORY TO COST OF SALES

September 26, 2019

When the inventory is moved to cost of goods sold, there are 3 main methods adopted to value those inventory items which are moved.

 

1) FIFO Method (First in First Out Method)
2) Specific Identification Method
3) Weighted Average Method

 

FIFO METHOD

 

FIFO method of valuation is generally used when there are large items of inventory and if they are perishable. When the items are sold, it is assumed that the inventory which came in are sold first. Hence the cost of the inventory which came in first is assigned to the cost of goods sold. The ending inventory, in turn, carries the value of the newest inventory.

 

WEIGHTED AVERAGE METHOD

 

There is one more method of valuation generally applied when there are large items of inventory, that is the weighted average method. Under the weighted average method, the cost of beginning inventory is added to the total purchase cost till date from the start of the period and then they are divided by the quantity in the beginning inventory and quantity purchased to date from the beginning of the period. The rate arrived by this method is applied to the cost of goods sold and also to the ending inventory.

 

The formula for weighted average method

 

Beginning inventory cost + Purchase cost to date
-----------------------------------------------------------------
Qty Beginning inventory + Qty purchased to date

 

SPECIFIC IDENTIFICATION METHOD

 

 Unlike the FIFO method and weighted average method, specific identification method of valuation is simple and direct. Specific identification method of valuation is generally applied when the company produce a low volume of transactions of uniquely identifiable products in inventory(such as automobiles). In this case, it is easy to determine which unit was sold. 

 

 


 

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