Chapter 18: Inventory and Overhead

Chapter 18: Inventory and Overhead

1. Specific Identification Method: Can identify original purchase cost of item with the item

   • 1. Calculate cost of goods
   • 2. Calculate cost of ending inventory
   • 3. Calculate COGS
   • Cost of goods available for sale - cost of ending inventory = COGS

2. Weighted-Average Method: prices ending inventory by using average unit cost

   • 1. Calculate average unit cost
   • 2. Calculate cost of ending inventory
   • 3. Calculate COGS

3. FIFO

   • First goods brought into store are first ones sold
   • 1. List units included in ending inventory and costs
   • 2. calculate cost of ending inventory
   • Calculate COGS

4. LIFO

   • Goods sold first are the last goods brought into the store
   • 1. list units included in ending inventory and costs
   • 2. Calculate cost of ending inventory
   • 3. Calculate COGs
   • Examples: DVD's, computers
     • Because they have declining replacement costs
   • Lower taxes for companies using LIFO

5. Retail Method

   • 1. Calculate cost of goods available at cost & retail
   • 2. Calculate cost ration
   • 3. Subtract net sales from cost of goods available
   • 4. Multiply cost ration by ending inventory

6. Gross Profit Method

   • Company keeps track of average gross profit rate, net sales at retail, Beg Inventory & Net purchase.
   • 1. Calculate cost of goods available for sale
     • Beg Inv + Net Purchase
   • 2. Multiply Net sales by complement of gross profit rate
   • 3. Calculate cost of estimated ending inventory

7. Inventory Turnover - number of times company replaces inventory during specific time

   • Average Inventory

8. Inventory can be company's most expensive asset.

9. Overhead Expenses

   • Expenses not directly associated with specific department or product but contribute to running of business
     • Ex: rent or insurance
   • Distribution of overhead
     • Floor Space/ square feet
       • 1. Calculate total square feet
       • 2. Calculate ration base on floor space
       • 3. Multiply department floor space ratio by total OH
     • Sales volume
       • 1. Calculate total sales in departments
       • 2. Calculate ratio for each department based on sales
       • 3. Multiply department sales ratio by total OH

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