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
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