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Is hybrid specific Id and Average Cost Inventory costing allowed?

Hi All,

My lessons in inventory accounting are starting to pay off, and things are starting to become clear. I'm curious about the method I've been using to value my inventory, though.

I tend to buy my stock in lots. I may buy 10 units for $100, for example. Later, I might buy 10 more for only $50. Even though I buy in lots, the sale prices of the units are all over the map. Two different units from the first group may go for $10 and $75, even though the average cost was $10.

Thinking about inventory valuation, it makes sense to me to have a perpetual system in place. For one thing, there is no accounts receivable. Further, my customers pick the unique item out of my inventory that they want. There is no FIFO or LIFO structure. I'm not really doing an average either.

When I make a sale, I would do the following...

1) Debit (increase) Cash by the amount of the sale 2) Credit (increase) Sales Revenue by the amount of the sale 3) Debit (increase) COGS expense by average cost of an item from the item's purchase lot = $10. 4) Credit (decrease) Inventory Asset by same amount = $10.

Since each unit is unique, I know which lot each came from, and the cost of each lot, this seems proper to do. It is not, of course, a traditional Average Cost calculation, though. Since the units were bought in lots, I don't have a truly Specific Identification calculation either.

Assuming the jumbled mess I just tossed out makes any sense, does it seem as though this is a valid/allowable/legal/ethical way to manage these numbers?

I appreciate the help. I'm a software engineer by trade. I want to do the right things, but this isn't my natural ballywick.

Thanks and Regards, Max

Reply to
Max Moor
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Since you know the lot where each unit you sell originates, then you know the specific unit cost. When you make a sale, it does not matter if you sell the first or last unit in the lot because you have effectively determined the specific unit cost for the lot. This is certainly a valid and preferred method of inventory costing.

Reply to
Rocinante

Rocinante wrote in news:1ru27ony58pw5$. snipped-for-privacy@40tude.net:

Hi Again Rocinante,

As I said with the COGS questions, thank you for the great answer. I hope I'm learning more than just enough to be dangerous. :-)

I wonder if you might answer a follow up question to inventory accounting? What I should do if, for example, I buy a lot of ten books to resell, get them back to the store, then decide not to list two of them.

To be proper, it seems I should still list all ten in my inventory, so the cost of the inventory is correctly recorded. They were all purchased for that purpose after all.

I would still need to "discard" the two I'm not selling, though. I imagine I would credit the inventory account for the two books, just as if they were sold. What is the matching journal entry? Is it just a standard expense item called something like "Inventory Losses," or is there a specific account that is normally used for such a thing?

Again, I appreciate the time you're spending helping me more than I can say. I'm feeling much better about things. (And some say the Usenet is outmoded.)

Regards, Max

Reply to
Max Moor

"Max Moor" wrote

To add to that remark, you can use any method for costing (not valuing) inventory that works for your needs. What you should do though, and must do, if someone else is using your financial statements, is to disclose your inventory and other accounting methods in the notes to the financials.

For internal purposes, you and anyone else involved in your business should know how you do things.

What did you do with the two items? Specifically. Did you toss them out? Then an "inventory shrinkage" account works there. If you used them in the business, then expense them for supplies. If you gave them away as samples or gifts, then expense them accordingly.

And if you did anything other than toss them in the trash, you might owe use tax on that item or items.

In accounting there is rarely a simple yes / no answer to a problem.

Reply to
Paul Thomas, CPA

"Paul Thomas, CPA" wrote in news:mHNzk.30271$ snipped-for-privacy@bignews9.bellsouth.net:

So I'm learning.

The two books in the example might go away by any of the examples you mentioned. I'll make an effort to account for them properly as it happens.

Incidentally, I finally noticed your name in the footer of your reply. So, thank you Paul (not Rocinante) for the assistance. You've been very helpful.

Regards, Max

Reply to
Max Moor

"Rocinante" wrote

"Logical"? Maybe for accounting, but not for tax.

Reply to
Paul Thomas, CPA

I'm sorry, I did get mixed up! So much for the intellectual thinking of a software engineer. :-)

Reply to
Max Moor

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