Financial Accounting: An Integrated Statements Approach, 2nd Edition

Deducting the cost of merchandise sold of $7,600 from the $10,400 of merchandise

available for sale yields $2,800 as the cost of the inventory at December 31. The $2,800

inventory is made up of the earliest costs incurred for this item. Exhibit 8 shows the

relationship of the cost of merchandise sold during the year and the inventory at

December 31.

276 Chapter 6 Inventories

Exhibit 8

Last-In, First-Out Flow

of Costs

100 units

at $12

Purchases

Merchandise

Available

for Sale

Cost of

Merchandise

Sold

Sept. 21

400

units

at

$11

Nov. 18

100

units

at

$12

Mar. 10

300

units

at

$10

Jan. 1

200

units

at

$9

$10,400

4,400

3,000

$ 1,800

1,200

Merchandise

Inventory

$2,000

4,400

1,200

$7,600

$1,800

1,000

$2,800

400 units

at $11

100 units

at $10

200

units

at $10

200 unitsat $9

Average Cost Method

The average cost method is sometimes called the weighted average method. When this

method is used, costs are matched against revenue according to an average of the unit

cost of the goods sold. The same weighted average unit costs are used in determining

the cost of the merchandise inventory at the end of the period. For businesses in which

merchandise sales may be made up of various purchases of identical units, the aver-

age method approximates the physical flow of goods.

The weighted average unit cost is determined by dividing the total cost of the units

of each item available for sale during the period by the related number of units of that

item. Using the same cost data as in the fifo and lifo examples, the average cost of the

1,000 units, $10.40, and the cost of the 700 units, $7,280, are determined as follows:

Average unit cost: $10,4001,000 units $10.40

Cost of merchandise sold: 700 units at $10.40 $7,280

Deducting the cost of merchandise sold of $7,280 from the $10,400 of merchandise

available for sale yields $3,120 as the cost of the inventory at December 31.