inventory management
TRANSCRIPT
INVENTORY MANAGEMENT
ONE OF THE MOST EMBARRASSING
SITUATIONS FOR A SUPPLY CHAIN MANAGER IS TO RUN OUT OF STOCK EVENTUALLY BRINGING
CERTAIN OPERATIONS TO A HALT.
SO WHAT?
HAVE MORE INVENTORY – NO STOCKOUTS
BUT THEN WHAT ABOUT……INVENTORY CARRYING COSTS !!!
INTRODUCTION
• Inventory decisions are high-risk and high-impact from the perspective of logistics operations.
• Inventory assortment and subsequent shipment in anticipation of future sales determine a number of logistics activities.
• Without proper coordination, sales may be lost and customer satisfaction may also decline.
• Also critical to manufacturing.• RM shortages can shut down the line or modify a
production schedule leading to added costs and FG shortages.
• Overstock inventories can also increase costs and reduce profitability through added warehousing, working capital requirements, deterioration, insurance, taxes, and obsolescence.
NOTE IT……..
• Constitutes significant part of current assets
• On an average approximately 60% of current assets in Public Limited Companies in India.
• A considerable amount of fund is required
• Effective and efficient management is imperative to avoid unnecessary investment.
Basic Concept
Input Purchase ----------> Input Utilized Product value realized
Time
Inventory
Inventory
Inputs• Raw Materials• Purchased parts• Maintenance and
Repair Materials
Outputs• Finished Goods• Scrap and Waste
Process
In Process• Partially
Completed Products and Subassemblies
(in warehouses, or “in transit”)
(often on the factory floor)
Inventory
Work inprocess
Work inprocess
Work inprocess
Finishedgoods
RawMaterials
Vendors Customer
Water Tank Analogy for Inventory
Supply RateInventory Level
Demand Rate
Inventory Level
MEANING• A physical resource that a firm holds in stock with the
intent of selling it or transforming it into a valuable state.
• Any stored resource used to satisfy a current or future need (Raw Materials, Work-in-process, finished goods, etc)
• Inventory is a list/record for goods and materials, held available in stock by a business
EFFECTS
• Represents as much as 50% of invested capitol at some companies.
• Excessive inventory levels are costly.
• Insufficient inventory levels lead to stock outs.
• Storage costs are high.
FIVE REASONS:• It enables the firm to achieve economies of scale• It balances supply and demand• It enables specialization in manufacturing• It provides protection from uncertainties in demand
and order cycle• It acts as a buffer between critical interfaces within
the channel of distribution
REASONS TO HOLD INVENTORY
• Inventory is required to realize the economies of scale in purchasing, transportation or manufacturing.
• Example: ordering large quantities of raw materials/ finished goods inventory allows the manufacturer to take advantage of the per unit price reductions associated with the volume purchases.
• Purchased materials have a lower transportation cost per unit if ordered in large volumes because less handling is required.
Economies of scale
• Seasonal supply or demand may make it necessary for a firm to hold inventory
• Example: Boxed Chocolate sales increase during Mother’s Day• Demand for a product may be relatively stable throughout the
year, but raw materials may be available only at certain times during the year (e.g. producer of canned fruits and vegetables) this makes necessary to manufacture finished products in excess of current demand and hold in inventory
Balancing Supply and Demand for Seasonal Inventories
• Inventory makes it possible for each of the firm’s plants to specialize in the products that it manufactures
• The finished product can be shipped to field warehouses where they are mixed to fill customer order
• The specialization by facility is known as Focused Factories
Specialization
• Inventory is held to prevent a stock-out in the case of variability in demand or variability in the replenishment cycle
• example: price increase, supply shortage and to maintain a source of supply
Protection from Uncertainties and Order Cycle
• Inventory is held throughout the supply chain to act as a buffer for the following critical interfaces:
1. Supplier – procurement (purchasing)2. Procurement – production3. Production – marketing4. Marketing – distribution5. Distribution – intermediary6. Intermediary – consumer/user
Inventory as a Buffer
REASONS TO REASONS TO NOTNOT HOLD INVENTORY HOLD INVENTORY
• Carrying cost– Financially calculable
• Takes up valuable factory space– Especially for in-process inventory
• Inventory covers up “problems” …– That are best exposed and solved
DANGERS OF OVER INVESTMENT
• Unnecessary tie-up of firm’s fund and loss of profit – involves opportunity cost
• Excessive carrying cost
• Risk of liquidity – difficult to convert to cash
• Physical deterioration of inventories while in storage due to mishandling and improper storage facilities.
DANGERS OF UNDER INVESTMENT
• Production hold-ups – loss of labor hours
• Failure to meet delivery commitments
• Customers may shift to competitors which will amount to a permanent loss to the firm
• May affect the goodwill and image of the firm
Inventory Hides Problems
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
To Expose Problems:Reduce Inventory Levels
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
Remove Sources of Problems and Repeat the Process
Poor Quality
UnreliableSupplier
MachineBreakdownInefficient
Layout
BadDesign
LengthySetups
Raw materials inventory
Supplier inventory
Work-in-process
inventory
Finished goods
inventory at plant location
Retail inventory
Reworking or repackaging of product
Waste and by
product
Waste disposal KEY: Forward logistics flow
Reverse logistics flow
The Logistics Flow
Reverse logistic move product backward through the channel for a number of reasonExample: a customer may return a product because it is damaged/ manufacturer may need to recall a product because of defects
Finished goods inventory at field
location
Consumer inventory
Cycle stock
• That results from replenishment of inventory sold or used
• It is required in order to meet demand under conditions of certainty; when the firm can predict demand and replenishment times (lead times)
• Example: if the rate of sales for a product is a constant 20 units per day and the lead time is always 10 days no inventory beyond the cycle stock would be required
TYPES
Basic inventory Principles – cycle stock
0 10 20 30 40 50 60
0 10 20 30 40 50 60
0 10 20 30 40 50 60
300
600
100
200
200
400Inventory Order
place
Order arrival
Orderplace
Order arrival
AverageCycleinventory
Days
B Order quantity of 200 units
Inventory Orderplace
Order arrival:
AverageCycleinventory
Days
C Order quantity of 600 units
Inventory
Orderplace
Order arrival:Next order placed
AverageCycleinventory
Days
A Order quantity of 400 units
Orderplace
In-transit Inventories• Items that are en route from one location to another• Considered part of cycle stock even though they are
not available for sale or shipment until after they arrive at the destination
• In-transit inventory should be considered as inventory at the place of arrival since the items are not available for use, sale or subsequent reshipment
Safety or Buffer Stock• Is held in excess of cycle stock because of uncertainty
in demand or lead time• Average inventory at a stock-keeping location is
equal to half the order quantity plus the safety stock
Average inventory investment under conditions of uncertainty
Inventory200
100
SafetyStock(50)
10
8
20Days
3040
AverageCycleinventory
Inventory200
100
SafetyStock(40)
121020Days
3040
AverageCycleinventory
B With variable lead time
Inventory200
100
SafetyStock(100)
121020Days
3040
AverageCycleinventory
C With variable demand and lead time
8
a With variable demand
10
Speculative Stock
• Is inventory held for reason other than satisfying current demand.
• Example: materials may be purchased in volumes larger than necessary in order to receive quantity discount, because of a forecasted price increase or materials shortage or to protect against the possibility of a strike.
Seasonal Stock
• Is a form of speculative stock that involves the accumulation of inventory before a seasonal period begins
• Example: agricultural product, fashion industry and seasonal items
Dead Stock
• Refers to items for which no demand has been registered for some specified period of time
• Might be obsolete throughout a company or only at one stock-keeping location
Inventory Planning and Control
For maintaining the right balance between high and low inventory to minimize cost
INVENTORY SYSTEM
• A set of policies and controls that :
– monitors levels of inventory and
– determines what levels should be maintained,
– when stock should be replenished, and
– how large orders should be maintained.
BENEFITS
• Ensure a continuous supply of raw materials and supplies to facilitate uninterrupted production.
• Maintain sufficient finished goods for smooth sales operation and efficient customer service.
• It permits the procurement of raw materials in economic lot sizes as well as processing of these raw materials into finished goods in the most economical quantities.
• It helps to reduce the material handling costs.
• It helps to utilize people and environment.
• Reduce dependencies of one another and enable the organizations to schedule its operations independently of another.
• It facilitates product display and service to customers.
• It enables management to make cost and consumption comparisons between operations and periods.
• It keeps the obsolescence losses, inventory carrying costs to the minimum.
• It provides a check against the loss of materials.
INVENTORY MANAGEMENT
It involves the development and administration of policies, systems and procedures which will minimize total costs relative to inventory decisions and related functions such as customer service requirements, production scheduling and purchasing.
• The key measure of effective inventory management is the impact that inventory has on corporate profitability
• Effective inventory management can improve profitability by lowering costs or supporting increased sale
• Better inventory management can increase the ability to control and predict how inventory investment will change in response to management policy
INVENTORY MANAGEMENT EFFECTIVENESS
Inventory Cost Structures
An optimum inventory level involves the following main types of costs:
• Ordering costs• Carrying (or holding) costs• Stock out costs• Capacity costs
• ORDERING COSTS – Quotation or Tendering– Requisitioning– Order placing– Transportation– Receiving, inspecting and storing– Quality control– Clerical and staff
• CARRYING COSTS– Warehousing or storage– Handling– Clerical and staff– Insurance– Interest– Deterioration, shrinkage, evaporation and obsolescence– Taxes– Cost of capital
• STOCK-OUT COSTS:– Loss of Sale
– Failure to meet delivery requirements
– Back ordering costs.
• CAPACITY COSTS:– Overtime payments when capacity is too small
– Layoffs and idle time when capacity is too large.
DECIDING ON THE INVENTORY MODEL
• Assume an analyst applies an inventory model that does not allow for spoilage to a grocery chain’s ordering policy for lettuce and formulates the strategy of ordering lettuce in large amounts every 14 days. A little thought will show that this is obliviously foolish. This strategy implies that lettuce will be spoiled. However it is not a failure of inventory, it is a failure to apply the correct model.
Inventory Management Inventory Management Systems/ModelsSystems/Models
• While managing inventory one must:
– Prioritize the items (ABC)
– Know how much to order (EOQ)
– Know when to order (ROP)
– Know to order (Continuous/Periodic)
– Know to track inventory (perpetual/physical)
(these are also known as Inventory Control Techiniques)
PRIORITIZATION TECHNIQUES
• Always better control (ABC) classification.• High, medium and low (HML) classification.• Vital essential and desirable (VED) classification.• Scarce difficulty and easy to obtain (SDE)• Fast moving, slow moving and non-moving (FSN)• GOLF classification• SOS classification
• ABC Analysis – inventories are classified on the basis of their consumption value.
• A – High value so, Low volume• B – Medium Value so, larger inventory level.• C – Low Value so, highest inventory level.
Also called Selective Control Inventory Method (SIM)
ABC Analysis
ABC Analysis• Recognizes that some inventory items are
more important than others
• A group items are considered critical (often about 70% of dollar value and 10% of items)
• B group items are important but not critical (often about 20% of dollar value and 20% of items)
• C group items are not as important (often about 10% of dollar value and 70% of items)
Silicon Chips Inc. Example
• Maker of super fast DRAM chips• Has 10 inventory items• Wants to classify them into A, B, and C groups• Calculate dollar value of each item and rank
items
Inventory Items for Silicon Chips
• A-items
– Track carefully (e.g. continuous review)
– Sophisticated forecasting to assure correct levels
• C-items
– Track less frequently (e.g. periodic review)
– Accept risks of too much or too little (depending on the item)
THEREFORE…….
HML Classification
• On the basis of unit value of item
• For e.g. there is 1000 unit of Q @ Rs.10 and 10000 units of W @ Rs.5
• Aimed to control the purchase of raw materials
H – High, M – Medium, L - Low
VED CLASSIFICATION
• Mainly for spare parts because their consumption pattern is different from raw materials.
• Classification is done on the basis of criticality of the item.
V – Vital, E – Essential, D - Desirable• Therefore V items has to be stocked more and D
items has to be less stocked.
FSN CLASSIFICATION
• According to the consumption pattern
• To combat obsolete items
F – Fast Moving, S – Slow Moving, N – Non Moving
SDF & GOLF CLASSIFICATION
• SDF:
• Based on source of procurement
S – Scarce, D – Difficult, E – Easy
• GOLF:
G – Government, O – Ordinary, L – Local, F - Foreign
SOS CLASSIFICATION
• Raw Materials especially for agriculture units
S – Seasonal, OS – Off Seasonal
ECONOMIC ORDER QUANTITY(EOQ)
Determining How Much to Order
• One of the oldest and most well known inventory control techniques
• Easy to use
• Based on a number of assumptions
• The best policy by minimizing the total of inventory carrying costs and ordering costs
• The EOQ is a concept which determines the optimal order quantity on the basis of ordering and carrying costs
• When incremental ordering costs equal incremental carrying costs, the most economic order quantity exists
Economic Order Quantity (EOQ)Model
THE BEST EOQ
EOQ recognizes the tug of war between acquisition costs and inventory carrying costs: when you order bigger quantities less frequently, your aggregate acquisition costs are low but your inventory costs are high due to higher inventory levels. Conversely, when you order smaller quantities more often, your inventory costs are low but your acquisition costs are higher because you are expending more resources on ordering. The EOQ is the order quantity that minimizes the sum of these two costs.
Economic Order Quantity (EOQ) (Assumptions)
• Demand is known and constant (AUU = annual usage in units)
• Ordering (setup) cost (ACPO = acquisition costs per order)
• Unit cost is constant (no quantity discounts) (UC)• Annual carrying costs on inventory value
(CCP = carrying cost percentage) • No stock outs.• Receipts of inventory is instantaneous.• Material is ordered or produced in a lot or batch.
FORMULA
EOQ =
2 x ACPO x AUU
UC x CCP
Where,
ACPO – Acquisition Costs Per Order
AUU – Annual Usage in Units
UC – Unit Cost
CCP – Carrying Cost Percentage
EOQ (Example#1)
• AUU = 4800 units• ACPU = Rs.40• UC = Rs.100 • CCP = 25%
WHAT IS THE EOQ?
EOQ (Example#1)
• AUU = 4800 units• ACPU = Rs.40• UC = Rs.100 • CCP = 25%
√ 2x40x4800
100 x 25%EOQ =
= 124 UNITS
DO IT YOURSELF…….
• It costs you $150 in overhead per order
• You use 5000 units a year
• Your finance department tells you that annual carrying costs are equal to 20% of the value of goods in stock.
• You pay $200 per unit
• You should order…………….?
DO IT YOURSELF…….
• It costs you $150 in overhead per order
• You use 5000 units a year
• Your finance department tells you that annual carrying costs are equal to 20% of the value of goods in stock.
• You pay $200 per unit
• You should order…………….?
194 units at a time
EOQ Inventory Order CycleEOQ Inventory Order Cycle
Demand rate
0 TimeLead time
Lead time
Order Placed
Order Placed
Order Received
Order Received
Inve
ntor
y L
evel
Reorder point, R
Order qty, Q
As Q increases, average inventory level increases, but number of orders placed decreases
ave = Q/2
REORDER POINTDetermining When to Order
• After Q* is determined, the second decision is when to order
• Orders must usually be placed before inventory reaches 0 due to order lead time
• Lead time is the time from placing the order until it is received
• The reorder point (ROP) depends on the lead time (L)
FORMULA (ROP)
ROP = SSQ + (QUD X ALT) (if safety stock is included)
Where,ROP = Reorder PointSSQ = Safety Stock QuantityQUD = Quantity used dailyALT = Average Lead Time (in days)
ROP(Example#1)
• Minimum Daily requirement – 800 units
• Time required to receive emergency supplies – 4 days
• Average daily requirement – 700 units
• Time required for refresh supplies – 30 days
• Calculate ordering point or re-order level.
ROP(Example#1)• Minimum Daily requirement – 800 units• Time required to receive emergency supplies – 4 days• Average daily requirement – 700 units• Time required for refresh supplies – 30 days• Calculate ordering point or re-order level.
Calculation:
ROP = 800 x 30
= 24000 units
ROP(Example#2)• Two types of materials are used.
• Minimum usage – 20 units per week each
• Maximum usage – 40 units per week each
• Normal usage – 60 units per week each
• Lead time;– Material A - 3 to 5 weeks– Material B - 2 to 4 weeks
• Calculate re-order point for both materials.
ROP(Example#2)• Two types of materials are used.• Minimum usage – 20 units per week each• Maximum usage – 40 units per week each• Normal usage – 60 units per week each• Lead time;
– Material A - 3 to 5 weeks– Material B - 2 to 4 weeks
• Calculate re-order point for both materials.Calculation:A: 60 x 5 = 300 unitsB: 60 x 4 = 240 units
‘Q’ SYSTEM vs ‘P’ SYSTEM
IT IS EMPLOYED BY THE ORGANIZATION WITHIN THE BASIC FRAMEWORK OF MODELS – FIXED ORDER QUANTITY SYSTEM or Q SYSTEMFIXED ORDER PERIOD SYSTEM or P SYSTEM
DISTINCTIONPoints of Diff Q system P System
Quantity of order Constant-the same quantity order each time
Quantity of order varies each time order is placed.
Size of Inventory Less than P System Larger than Q System
Time to maintain Higher Less time
Record keeping Continuous Only at the review period
Period of order Any time when stock levels reaches to reorder point
Only after predetermined period.
INVENTORY TRACKING METHODS
• PERPETUAL INVENTORY SYSTEM
• PHYSICAL INVENTORY SYSTEM
Perpetual Inventory System
A perpetual inventory system tracks the number of items in inventory on a constant basis. With this system, a business keeps track of sales as they occur.
In a manual system, employees gather paper records of sales and enter that information into the inventory system. Computer-based systems are faster and more accurate.
perpetual inventory system
An inventory system that tracks the number of items in inventory on a constant basis.
Physical Inventory System
In a physical inventory system , stock is visually inspected or actually counted to determine the quantity on hand. A company uses this system alongside perpetual inventory systems to:
• Determine the correct value of its ending inventory
• Identify stock shortages
• Plan future purchases
There are numerous methods for inventory control.
Physical Inventory System
The most popular method of inventory management is the physical inventory. These are usually wall-to-wall store inventories that require the business to close temporarily to conduct the inventory.
Cycle counts allow a business to physically count only a small portion of the inventory every day to track the entire inventory. The inventory is counted by a stock keeping unit (SKU) , which is a unit or a group of related items.
cycle counts
A small portion of the inventory is physically counted each day by stock keeping units so that the entire inventory is accounted for on a regular basis.
stock keeping unit (SKU)
A unit or a group of related items in a unit control inventory system; the smallest unit used in inventory control.
Physical Inventory System
Visual control is used mainly by smaller businesses. It uses stock cards noting the necessary number of each displayed item. The difference between the number on the card and the actual number of items on hand is the amount that needs to be reordered.
This system is somewhat inaccurate because it does not account for misplaced merchandise.
Cycle Counting of Inventory
Cycle counting uses inventory classifications developed by ABC analysis.That is:• Class A items are counted frequently, perhaps once a month.• Class B items are counted less frequently, perhaps once a quarter.• Class C items are counted perhaps once every six months.
Using Both Systems
Most businesses find it most effective to use both systems because they complement each other. The perpetual system gives an up-to-date inventory record throughout the year. The physical system gives an accurate count that can be compared to the perpetual records to identify errors or problems.
Using Both Systems
When the physical count shows less merchandise than is supposed to be in inventory, a stock shortage or shrinkage has occurred. Possible reasons are:
• Employee and customer theft
• Receiving errors
• Incorrect counting
• Selling errors
Stock Control
Stock control involves monitoring stock levels and investments in stock so that a business is run efficiently. It includes:
• Dollar versus unit control methods
• Inventory turnover calculations
Using Both Systems
Dollar control represents the planning and monitoring of the total inventory investment that a business makes during a stated period of time. It helps a business determine the cost of goods sold and the amount of gross profit or loss during a given period of time.
dollar control
The planning and monitoring of the total inventory investment that a business makes during a stated period of time.
Using Both Systems
Unit control measures the quantities of merchandise that a business handles during a stated period of time. It allows purchasing personnel to see what brands, sizes, colors, and price ranges are popular.
unit control
The quantities of merchandise that a business handles during a stated period of time.
Using Both Systems
Inventory turnover is the number of times the average inventory has been sold and replaced in a given period of time. It is the most effective way to measure how well inventory is being managed.
The higher the inventory turnover rate, the more times the goods were sold and replaced. Stores that keep records of the retail value of stock compute their inventory turnover rates as follows:
_______Net sales (in retail dollars)________
Average inventory on hand (in retail dollars)
inventory turnover
The number of times the average inventory has been sold and replaced in a given period of time.
Using Both Systems
When only cost information about inventory is available, inventory turnover can be calculated with this formula:
_______Cost of goods sold________
Average inventory on hand (at cost)
Using Both Systems
When a store wants to look at the number of items carried in relation to the number of items sold, it calculates its stock turnover rates in units with this formula:
_______Number of SKUs sold________
Average SKUs on hand
MerchandiseAvailable
for Sale
Net Costof Purchases
Cost ofGoods Sold
BeginningInventory
EndingInventory
INVENTORY COST FLOWS
IMPORTANCE OF INVENTORY VALUATION
• Costing method has important effect on net income and asset valuation.
BeginningInv.
+ Inv.Purchase
= Goods Available for Sale
Ending Inv. Cost of Goods Sold
Needs to be allocatedWeighted Average
LIFOFIFO
Costing method
BASIC ASSUMPTIONS• FIFO (first-in, first-out): Units sold are
assumed to be first units purchased (ending inventory = costs of the last purchases)
• LIFO (last-in, first-out): Units sold are assumed to be last units purchased (ending inventory = cost of the first units purchased)
• Average (periodic): Unit cost = (cost of beginning inventory + cost of purchases) divided by the total units involved; thus, ending inventory = unit cost x units on hand!
AS A RESULT……..• FIFO: Ending inventory is costed using nearest-to-
year-end replacement costs.– Old (lower) costs were matched to sales, which produces a
“higher” reported gross profit.
• LIFO: Ending inventory is costed using nearest-to-year-start (oldest) costs.– New (higher) costs were matched to sales, which produces
a “lower” reported gross profit.
(Opposite results are reported during deflationary times)
Comparative Results During Inflation(1) In a period of rising prices, LIFO has the smallest
ending inventory and FIFO the largest.
(2) In a period of rising prices, LIFO has the largest cost of goods sold and FIFO the smallest.
(3) In a period of rising prices, FIFO has the largest gross profit and LIFO has the smallest.
When a unit is sold, the average cost of each
unit in inventory is assigned to cost of
goods sold.
When a unit is sold, the average cost of each
unit in inventory is assigned to cost of
goods sold.
Cost of Goods
Available for Sale
Units available on the date of
sale
÷
Average Cost
Use of Inventory Methods in Practice
Inventory Costing Method
Example # 1
• Facts:a. Retailer started the year with a beginning inventory of one refrigerator that cost $300.b. The retailer purchases another identical refrigerator for a cost of $340 during the year.c. At the end of the year, the retailer sells one of the refrigerators for $500.2. The total cost of goods available for sale equals beginning inventory plus purchases ($640 in this example).
Example # 1 (Cont’d)
– The first-in, first-out (FIFO) method of inventory costing method assumes that the first unit purchased is the first unit sold. Therefore, cost of goods sold in this example is $300.
– The last-in, first-out (LIFO) method of inventory costing method assumes that the last unit purchased is the first unit sold. Therefore, cost of goods sold in this example is $340.
Example # 1 (Cont’d)
FIFO LIFO Average
Sales Revenue $ 500 $ 500 $ 500
COGS $ 300 $ 340 $ 320
Operating Profit $ 200 $ 160 $ 180
Ending Value $ 340 $ 300 $ 320
Example 2• Facts: C & Co. had beginning inventory of 14,000
units purchased at $6 per unit, for a total opening cost of $84,000.
• ANNUAL INVENTORY ACTIVITY FOLLOWS:
Purchases Units Unit Cost Total Cost
January 10 10,000 $7.00 $ 70,000
June 15 15,000 $8.00 $120,000
December 1 8,000 $8.50 $ 68,000
Total 33,000 $258,000
Example 2 – Contd.
Sales Units Sales Price Total Sales
February 15 7,000 $15.00 $105,000
May 1 5,000 $16.00 $ 80,000
October 1 11,000 $17.00 $187,000
December 15 15,000 $18.00 $270,000
Total 38,000 $642,000
Calculate ending inventory, cost of goods sold and gross profit under three periodic methods: LIFO, FIFO and Average.
Cost of Good Available for Sale?• Solution:
– 47,000 units were available during the period (14,000 beginning inventory +
33,000 purchased)– 38,000 units were sold– 9,000 units were in ending inventory
• Cost of goods available for sale = $84,000 of beginning inventory + purchases of $ 258,000 = $ 342,000.
Example 2 – Contd.
LIFO Assumption• Ending Inventory = $54,000
The cost of the first 9,000 units purchased: 9,000 beginning inventory × $6
• Cost of Goods Sold = $288,000 Details: (8,000 × $8.50) + ($15,000 × $8) +
(10,000 × $7) + (5,000 × $6)
• Check: $54,000 + $288,000 = $342,000, the cost of goods available for sale
Example 2 – Contd.
FIFO Assumption• Ending Inventory = $76,000
The cost of the last 9,000 units purchased: (8,000 × $8.50) + (1,000 × $8)
• Cost of Goods Sold = $266,000Details: (14,000 × $6) + (10,000 × $7) +
(14,000 × $8)
• Check: $76,000 + $266,000 = $342,000, the cost of goods available for sale
Example 2 – Contd.
Periodic Averaging• Average Cost = $7.2766
$342,000 cost of goods available for sale 47,000 units available for sale
• Ending Inventory = $65,4899,000 units × $7.2766
• Cost of Goods Sold = $276,51138,000 units × $7.2766
• Check: $65,489 + $276,511 = $342,000, the cost of goods available for sale
Example 2 – Contd.
Comparative Results During InflationLIFO FIFO Average
Balance Sheet
Ending Inventory (1) 54,000 76,000 65,489
Income Statement
Sales 642,000 642,000 642,000
CGS (2) 288,000 266,000 276,511
Gross Profit (3) $354,000 $376,000 $365,489
Example 2 – Contd.