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The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory. There are two commonly used average cost methods: Simple weighted-average cost method and perpetual weighted-average cost method. [2]
The average cost = only the setup cost and there is no inventory holding cost. To satisfy the demand for period 1, 2 Producing lot 1 and 2 in one setup give us an average cost: = + The average cost = (the setup cost + the inventory holding cost of the lot required in period 2.) divided by 2 periods.
If she uses FIFO, her costs are 20 (10+10). If she uses average cost, her costs are 22 ( (10+10+12+12)/4 x 2). If she uses LIFO, her costs are 24 (12+12). Thus, her profit for accounting and tax purposes may be 20, 18, or 16, depending on her inventory method. After the sales, her inventory values are either 20, 22 or 24.
In theory, this method is considered the most accurate since it directly relates the ending inventory goods to the specific price they were bought for. However, it also presents a loophole for management to manipulate the ending inventory cost. They can choose to report that the cheaper goods were sold first, thereby inflating the ending ...
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. The gross profit ...
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.
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In accounting, the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales level. The equation for inventory turnover equals the cost of goods sold divided by the average inventory.