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Moving-average (unit) cost is a method of calculating ending inventory cost. Assume that both beginning inventory and beginning inventory cost are known. From them the cost per unit of beginning inventory can be calculated. During the year, multiple purchases are made. Each time, purchase costs are added to beginning inventory cost to get cost ...
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve (in the example above, it is $750, i.e. $5250 - $4500). This reserve, a form of contra account , is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
It requires a detailed physical count so that the company knows exactly how many of each good bought on specific dates comprise the year-end inventory. When this information is found, the amount of goods is multiplied by their purchase cost at their purchase date to get a number for the ending inventory cost.
Throughput accounting, under the Theory of Constraints, under which only totally variable costs are included in cost of goods sold and inventory is treated as investment. Lean accounting, in which most traditional costing methods are ignored in favor of measuring weekly "value streams".
A discussion of inventory from standard and Theory of Constraints-based cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. The internal costing/valuation of inventory can be complex.
Two very popular methods are 1)- retail inventory method, and 2)- gross profit (or gross margin) method. The retail inventory method uses a cost to retail price ratio. The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory.
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