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INVENTORY COSTING UNDER A PERPETUAL SYSTEM The major goal of inventory costing is to properly match costs with sales. The matching principle is used to decide how much of the cost of goods available for sale is debited to expense (COGS on the income statement) and how much is carried forward as an asset (Merchandise Inventory on the balance sheet).
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Cost Accounting is the process of accounting for cost which begins with recording of income and expenditure and ends with the preparation of statistical data. It is the formal mechanism by means of which cost of products or services are ascertained and controlled.
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Inventory management is the process of ordering, handling, storing, and using a company’s non-capitalized assets - AKA its inventory. For some businesses, this involves raw materials and components, while others may only deal with finished stock items ready for sale.
- About the Inventory guide
- References to US GAAP
- References to other PwC guidance
- Copyrights
- Excerpt from ASC 330-10-20
- 1.2.1.1 Consignment arrangements involving certain commodities
- 1.3.1 Inventory elements of cost
- 1.4.2 Full absorption costing — cost flow assumptions
- Not usually an inventoriable cost
- 1.5.2 Stores inventories
- 1.5.8 Merchandise purchase order terms
- 2.1 Retail inventory method overview
- Calculation of cost complement percentage
- 2.2.1 Accounting for markups and markdowns
- 2.2.2 Averaging of high markon and low markon goods
- 2.2.3 Seasonality and the significance of accumulation periods
- 2.2.4 Retail inventory method — vendor allowances
- 2.2.5 Retail inventory method — cash discounts
- 2.3 Inventory reserves
- 2.3.1 Shrinkage
- 3.1 LIFO inventories overview
- SAB Topic 5.L
- 3.2 LIFO methods
- 3.2.1 Specific-goods LIFO
- 3.2.2 Dollar-value LIFO
- 3.2.2.1 Dollar-value LIFO — double extension
- 3.2.2.2 Dollar-value LIFO — index method
- 3.2.2.3 Dollar-value LIFO — link-chain method
- 3.2.2.4 Dollar-value LIFO — published indices
- 3.2.2.5 Simplified LIFO
- 3.4.2 Supplemental disclosure of non-LIFO information
- 3.6.1 Measurement of amount to be disclosed in LIFO liquidation
- 3.7.2 LIFO — interim increments
- LIFO
- 3.8.2 LIFO — individual item reserve methodologies
- ASC 330-10-35-14
- 3.9.1 Incorporating new items into LIFO calculations
- 3.10 Retail industry LIFO practices
- 3.10.1 Application of LIFO when using RIM
- Inventory cost and LIFO reserve - retail LIFO method
- Ending inventory
PwC is pleased to offer the first edition of our Inventory guide. This guide summarizes the applicable accounting literature, including relevant references to and excerpts from the FASB’s Accounting Standards Codification (the Codification). It also provides our insights and perspectives, interpretative and application guidance, illustrative exampl...
Definitions, full paragraphs, and excerpts from the Financial Accounting Standards Board’s Accounting Standards Codification are clearly designated, either within quotes in the regular text or enclosed within a shaded box. In some instances, guidance was cited with minor editorial modification to flow in the context of the PwC Guide. The remaining ...
This guide focuses on the accounting and financial reporting considerations for inventory. It supplements information provided by the authoritative accounting literature and other PwC guidance. This guide provides general and specific references to chapters in other PwC guides to assist users in finding other relevant information. References to oth...
This publication has been prepared for general informational purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is gi...
Inventory: The aggregate of those items of tangible personal property that have any of the following characteristics: Held for sale in the ordinary course of business In the process of production for such sale To be currently consumed in the production of goods or services to be available for sale. The determination of which specific costs (or port...
Certain industries use precious metals (e.g., gold, silver, platinum) as raw materials in their production processes. Due to the significant cost of these precious metals, companies have explored ways to reduce the amount of their investment in inventory, such as implementing precious metals consignment arrangements with a financial institution or ...
The definition of cost as applied to inventories means, in principle, the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production costs, and its determination involves many considerations. Abnormal costs related ...
The primary objective in selecting an inventory costing method is to most clearly reflect periodic income. In other words, to match the specific costs of an item sold to its related revenues, which may be difficult in practice depending on an entity's circumstances. As a result, the general acceptance of several assumptions with respect to the flow...
Tools and equipment used in production but not capitalized X Costs of quality control and inspection X
It is common for manufacturing companies to maintain “stores” items, which are spare maintenance materials and parts kept on hand as backup components of major production lines. These items are considered essential to the operations of the facility. Keeping stores items on site is a significant investment that is made to prevent or limit lost produ...
Purchase order terms and procurement contracts generally include provisions related to taxes, duties, cash payment terms, insurance, rights of inspection and return, and terms relevant to the vendor’s revenue recognition. Often additional brokers, buying agents, quota holders, or others may have rights and duties along the supply chain. Entities of...
The retail inventory method (RIM) is commonly used by retail companies for inventory accounting and management reporting purposes. RIM has long been considered an acceptable inventory method under generally accepted accounting principles. However, authoritative literature does not provide specific guidance on the application of RIM. As such, entiti...
Net purchases are calculated as purchases less vendor returns and appropriate vendor allowances. Net markups do not impact the cost and include markups less markup cancellations. The cost complement percentage is applied to ending inventory at retail value, based on a physical inventory taken in retail dollars, net of markdowns, or based on perpetu...
Markups and markup cancellations generally should be accounted for “above the line” (i.e., as an adjustment to retail value in the calculation of the cost complement percentage). If a markup is reflected below the line (i.e., excluded from the cost complement calculation), the retail value used in the cost complement percentage calculation would be...
Since RIM is an averaging method, variations in the data can result in distortions of inventory amounts. Having high markon goods or low markon goods can overstate or understate inventory cost, respectively, if there is a disparity between the proportions of high and low markon goods used in the determination of the cost complement percentage as co...
Similar to the averaging of high markon and low markon goods, seasonality of margins can also result in inventory distortions. Markon percentages may fluctuate significantly from month to month and progressively throughout a season. These fluctuations could result in an overall cost complement percentage that is not representative of the ending inv...
The following summarizes the effect of vendor allowances on RIM. □ Vendor allowances for overcharges – credited directly to the purchases account, reducing the cost of inventory and, as a result, the cost complement percentage. □ □ □ Advertising allowances – those meeting the criteria to be credited to advertising expense would not impact the i...
Cash discounts may be offered by vendors on an ad hoc basis or as part of a volume discount program. Cash discounts should be credited directly to the purchases account at cost, reducing the cost of inventory and the cost complement percentage. If quantity discounts are received based on purchases for an entire season or year, an estimate should be...
When applying the inventory retail method, inventory balances are adjusted for shrinking, aging, obsolescence, seasonality, and permanent markdown accruals.
Shrinkage can often be material to a retailer's bottom-line earnings. The portability of many retail goods makes such merchandise an easy target for shoplifters in the absence of adequate security measures. While the causes of shrinkage vary by type of retailer, company, geographic region, and even individual store, the most common causes include s...
LIFO has long been considered an acceptable inventory method under generally accepted accounting principles. However, authoritative accounting literature does not provide specific definitive guidance on how to apply LIFO or specify the financial statement disclosures that should be made by companies using LIFO. Although the SEC and other profession...
In the absence of existing authoritative literature on LIFO accounting, the staff believes that registrants and their independent accountants should look to the [FinREC LIFO guidance] for guidance in determining what constitutes acceptable LIFO accounting practice.... In the event that the registrant and its independent accountants conclude that th...
LIFO cost may be computed using either the specific-goods method or the dollar-value method. The dollar-value approach is more common and encompasses several acceptable computational techniques.
Under the specific-goods method, calculations are based on physical units and require separate computations for similar products or items in inventory. Therefore, this method is generally used only in situations involving a limited number of inventory items or basic commodities that can be measured in terms of a common denominator, such as pounds, ...
Under dollar-value LIFO, inventory quantities are measured in terms of “base-year” dollar value rather than on physical units. Inventory is divided into “pools” of similar items and quantities for each pool are determined based on the cost of items as of a specific date (the base year). The base year is typically the beginning of the year in which ...
Under the double-extension method, total base-year cost of ending inventory (for computing increments and decrements) is determined by extending each item at its base-year cost. Each item is also extended at current-year cost to develop an index of current-year cost to base-year cost. That cumulative index is applied to any increment (increase in t...
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
*The calculation of the LIFO cost complement is not shown in this example.
Nov 28, 2008 · The main emphasis in cost accounting is on cost control and cost determination. Whereas the management accounting uses the principles and practices of financial accounting and costing...
- Joseph Anbarasu
basic idea in cost estimation is to estimate the relation between costs and the variables affecting costs, the cost drivers. We focus on the relation between costs and one impor - tant variable that affects them—activity level. Activities can be measured by volume (for example, units of output, machine-hours, pages typed, miles driven), by ...
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inventories. A primary issue in accounting for inventories is the amount of cost to be recognised as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value.
