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Chapter 6
Inventories
Appendix 6A:
Inventory costing methods
(Periodic inventory system)
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Learning objective
1. Determine the cost of goods sold and ending
inventory under the periodic inventory system for
each of the four inventory costing methods:
- Specific identification
- First-in, first-out (FIFO)
- Last-in, first-out (LIFO)
- Weighted average
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Periodic inventory system
▪ Recall that the periodic inventory system does not
continuously keep track of:
– Ending inventory
– Cost of goods sold
▪ These are calculated at
the end of the period
using the formula to
calculate cost of goods
sold
Formula to calculate cost of goods sold
Beginning inventory
+ Net purchases
= Cost of inventory available for sale
- Ending inventory
= Cost of goods sold
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Periodic inventory system
Steps to calculate COGS and ending inventory:
1.Calculate cost of inventory available for sale for
the period
2.Taking inventory to determine the number of units
on hand
3.Calculate ending inventory using an inventory
costing method
4.Calculate cost of goods sold using the value
calculated for ending inventory
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Illustration of inventory costing methods
▪ We now illustrate how to calculate the cost of goods
sold and ending inventory under the periodic
inventory system for each of the four inventory
costing methods using the following data:
Purchases
Date
Nov.
Description
Units
Unit
cost
Sales
Total
cost
1 Beginning inventory
50
x
$1 = $50
7 Purchases
75
x
$2 = $150
17 Purchases
15
x
$3 = $45
27 Sales
Units
?
Selling
price
x
$5 =
Sales
revenues
$300
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Step 1: Calculate inventory available for sale
▪ Calculated by taking beginning inventory and
adding the purchases for the period
Purchases
Date
Nov.
Description
Units
Unit
cost
Sales
Total
cost
1 Beginning inventory
50
x
$1 = $50
7 Purchases
75
x
$2 = $150
17 Purchases
15
x
$3 = $45
27 Sales
30 Totals
140
units
Units
Selling
price
?
$5
x
Sales
revenues
= $300
$245
▪ Inventory available for sale = 140 units worth $245
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Step 2: Taking inventory
▪ An inventory count revealed 80 units remaining on
hand at the end of the accounting period
▪ Therefore 140 – 80 = 60 units must have been sold
during the accounting period
▪ But what are the costs assigned to the 80 units of
ending inventory and 60 units sold?
▪ We now calculate ending inventory and cot of goods
sold under each inventory costing method in the
periodic system
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Step 3: Specific identification - periodic
▪ The inventory count specifically identified the
following number of units at each unit cost
Inventory balance
specific identification
Units
Unit
cost
Total
cost
15
$1
$15
55
$2
$110
10
$3
$30
80 units
$155
▪ Ending inventory = $155
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Step 4: Specific identification - periodic
▪ Use the $155 balance of ending inventory to
calculate cost of goods sold
Cost of goods sold – specific identification
Units
Cost of inventory available for sale
$
140
245
- Ending inventory
80
155
= Cost of goods sold
60
90
▪ Cost of goods sold = $90
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Step 3: FIFO - periodic
▪ FIFO assumes the cost of the 80 units in ending
inventory to be that of the most recent purchases
Inventory balance
FIFO
Units
Unit
cost
Total
cost
65
$2
$130
15
$3
$45
80 units
$175
▪ Ending inventory = $175
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Step 4: FIFO - periodic
▪ Use the $175 balance of ending inventory to
calculate cost of goods sold
Cost of goods sold – FIFO
Units
Cost of inventory available for sale
$
140
245
- Ending inventory
80
175
= Cost of goods sold
60
70
▪ Cost of goods sold = $70
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Step 3: LIFO - periodic
▪ LIFO assumes the cost of the 80 units in ending
inventory to be that of the earliest purchases
Inventory balance
LIFO
Units
Unit
cost
Total
cost
50
$1
$50
30
$2
$60
80 units
$110
▪ Ending inventory = $110
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Step 4: LIFO - periodic
▪ Use the $110 balance of ending inventory to
calculate cost of goods sold
Cost of goods sold – LIFO
Units
Cost of inventory available for sale
$
140
245
- Ending inventory
80
110
= Cost of goods sold
60
135
▪ Cost of goods sold = $135
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Step 3: Weighted average - periodic
▪ First we need to calculate a weighted average cost
of the units of inventory available for sale
throughout the period
Weighted average cost =
=
Total cost of goods available for sale
Total number of units available for sale
$245
140 units
= $1.75 per unit
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Step 3: Weighted average - periodic
▪ We use the weighed average cost multiplied by the
number of units to calculate ending inventory
Inventory balance
Weighted average
Units
x
Weighed
average
cost
=
Total
cost
80
x
$1.75
=
$140
▪ Ending inventory = $140
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Step 4: Weighted average - periodic
▪ Use the $140 balance of ending inventory to
calculate cost of goods sold
Cost of goods sold – Weighted average
Units
Cost of inventory available for sale
$
140
245
- Ending inventory
80
140
= Cost of goods sold
60
105
▪ Cost of goods sold = $105
▪ Check: 60 units x $1.75 = $105 
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