Lesson Objectives:- Comparing the average cost method for the two types of inventory systems.
- Calculating moving averages.
- Calculating the final cost of goods sold and ending inventory.
The last topic we will cover when reviewing merchandising inventory concepts will be the average cost method and how it is used for the perpetual system.
The periodic system was much simpler because we just needed to calculate the weighted average cost and multiply it by the total units sold. The perpetual inventory system is more complex because we will need to create a moving average after each purchase that is made.
Remember this falls in line with the fact that the perpetual inventory system has an entry for every inventory transaction.
We will use the same table of purchase and sale examples above for consistency.
We will start by multiplying out the beginning inventory by the unit cost, and then listing the first purchase multiplied by the unit cost. After the first transaction, we have $1,200 worth of inventory and 500 units. For the first average cost, the 1200 is divided by the total units to come up with $2.40 per unit.
For the first sale, we would multiple the 300 units sold by the first average cost of $2.40 to come up with a cost of goods sold of $720.
We now have 200 units left from the original inventory at a per unit cost of $2.40 for a total of $480. The next 100 units were purchased at a unit cost of $3.50 to total $350. The two figures would be summed up to $830 and then divided by the total of 300 units to come up with a new average cost of $2.77 per unit.
Next, we would multiply the next sale of 250 units by the new average cost of $2.77 to come up with a second cost of goods sold of $692.50.
Now that we've sold 250 of the 300 available units, we are left with 50 units at $ 2.77/unit. We then have one final purchase for 300 units at $4/unit. The totals of $138.50 and $1,200.00 are summed up to conclude with the ending inventory figure of $1338.50.
To come up with the final cost of goods sold figure, we would simply add up the two costs that we calculating when using the moving averages. In this example, we would sum up $720 and $692.50 for a COGS value of $1,412.50.
Remember that the moving average technique will always be used for the perpetual system to calculate the cost of goods sold and ending inventory figures. In contrast, the periodic system simply uses a weighted average multiplied by the total amount of goods sold.