10 Inventory
Tracking Systems and Valuation Techniques
Now let’s solve these same problems using average cost. As a reminder average cost blends the cost of all inventory purchased but unsold, so the inventory balance is a running average. We will start with a table to calculate the increase in COGS when goods are sold, and the running balance for inventory.
- My Turn
- Spruce It Up Ltd (SIU) using average cost
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AVERAGE COST: CALCULATIONS |
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Date |
Description |
Increase to COGS |
Inventory balance |
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Nov 1 |
Purchase of 100@$50/unit |
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100 units @ $50/unit: $5,000 Average cost: $5,000/100= $50/unit |
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Nov 10 |
Purchase of 60@$65/unit |
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100 units @ $50/unit= $5,000 60 units @ $65/unit= $3,900 Total inventory cost: $8,900 Average cost: $8,900/160= $55.63 |
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Nov 16 |
Sale of 40 units |
40 units @$55.63/unit = $2,225 |
120 units @ $55.63/unit = $6,676 |
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Nov 20 |
Purchase of 20@$55/unit |
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120 units @ $55.63/unit= $6,676 20 units @ $55/unit= $1,100 Total inventory cost: $7,776 Average cost: $7,776/140= $55.54 |
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Nov 25 |
Sale of 70 units |
70 units @ $55.54/unit= $3,888 |
70 units @ $55.54/unit= $3,888 |
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Dec 1 |
Purchase of 30@$70/unit |
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70 units @ $55.54/unit= $3,888 30 units @ $70/unit= $2,100 Total inventory cost: $5,988 Average cost: $5,988/100= $59.88 |
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Dec 12 |
Sale of 80 units |
80 units @ $59.88/unit= $4,790 |
20 units @$59.88/unit = $1,198 |
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Dec 15 |
Purchase of 45@$110/unit |
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20 units @ $59.88/unit = $1,198 45 units @ $110/unit= $4,950 Total inventory cost: $6,148 Average cost: $6,148/65= $94.58 |
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Dec 17 |
Sale of 50 units |
50 units @ $94.58/unit = $4,729 |
15 units @ $94.58/unit = $1,419 |
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Dec 18 |
Purchase of 30@$130/unit |
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15 units @ $94.58/unit= $1,419 30 units @ $130/unit = $3,900 Total inventory cost: $5,319 Average cost: $5,319/45= $118.20 |
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Dec 21 |
Sale of all remaining units |
45 units @ $118.20/unit= $5,319 |
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Total |
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$2,225 + $3,888 + $4,790 + $4,729 + $5,319 = $20,951 increase to COGS |
$0 ending inventory balance |
Journal entries:
November 1
| DR | Inventory | 5000 | ||
| CR | Accounts Payable | 5000 |
November 10
| DR | Inventory | 3900 | ||
| CR | Accounts Payable | 3900 |
November 16
| DR | Cash | 6000 | ||
| CR | Sales Revenue | 6000 |
| DR | Cost of Goods Sold | 2225 | |||
| CR | Inventory | 2225 |
November 20
| DR | Inventory | 1100 | ||
| CR | Accounts Payable | 1100 |
November 25
| DR | Cash | 10500 | ||
| CR | Sales Revenue | 10500 |
| DR | Cost of Goods Sold | 3888 | |||
| CR | Inventory | 3888 |
November 30
| DR | Accounts Payable | 10000 | ||
| CR | Cash | 10000 |
December 1
| DR | Inventory | 2100 | ||
| CR | Accounts Payable | 2100 |
December 12
| DR | Cash | 12000 | ||
| CR | Sales Revenue | 12000 |
| DR | Cost of Goods Sold | 4790 | |||
| CR | Inventory | 4790 |
December 15
| DR | Inventory | 4950 | ||
| CR | Accounts Payable | 4950 |
December 17
| DR | Cash | 7500 | ||
| CR | Sales Revenue | 7500 |
| DR | Cost of Goods Sold | 4729 | |||
| CR | Inventory | 4729 |
December 18
| DR | Inventory | 3900 | ||
| CR | Accounts Payable | 3900 |
December 21
| DR | Cash | 6750 | ||
| CR | Sales Revenue | 6750 |
| DR | Cost of Goods Sold | 5319 | |||
| CR | Inventory | 5319 |
December 24
| DR | Accounts Payable | 10950 | ||
| CR | Cash | 10950 |
Here it comes again – the SHL example. This time use the weighted average cost method. You’ve got this!
Well done! Many students find average costing less intuitive than first-in-first-out, so let’s get some more practice in on this costing method. Give Sweet Dreams Inc. a try!
Awesome progress! Good work! You’ve learned all about accounting for inventory. Now let’s look at how we might evaluate inventory management.
