vessemir

[vessemir]

Up

1

::

Consider the following string of orders:

Month	Number of Units bought	Cost per unit	Number of units sold	Selling price per unit
Jan	100	2
Feb			50	1
Mar	200	3
Apr			20	4

What is perpetual inventory system? Its nothing but accounting for cost of goods sold as you go along the period.
What is periodic inventory system? It is nothing but accounting for cost of goods sold at the very end.

First lets calculate average cost,
At the end of Feb, the average cost per unit = 2*100/100 = 2
At the end of Apr the average cost per unit = (2*100+3*200)/(100+200) = 2.67

In a periodic inventory system (at the very end of April),
FIFO COGS = 50*2 + 20*2 = 140

LIFO COGS = 50*3 + 20*3 = 210

Average cost COGS = (50 + 20)*2.67 =  186.9 (Use Average cost per unit for the end of April)

In a perpetual inventory system (As we go along selling the inventory),
FIFO COGS = 50*2 + 20*2 = 140

LIFO COGS = 50*2 + 20*3 = 160

Average Cost COGS = 50*(Average cost per unit at the end of Feb) + 20*(Average cost per unit at the end of April)
= 50*2 + 20*2.67
= 153.4

Notice, the FIFO COGS didn’t change but the COGS for LIFO and Average cost method changed. This is the reason for change in gross profit.

Hope that answers it.

 

[Author]

Posts