Getting our group project assignments today. Both the other people in my group seem like reliable sorts. That’s a good thing.
Normally the cost of goods sold can be found by subtracting the cost of the ending inventory from the cost of goods available for sale.
This doesn’t work well with perpetual inventory systems, because the ending inventory is constantly replenished. Such companies must track units sold and multiply by the cost of each unit. The price of an individual unit is likely to vary over time, however. Companies which sell in volume make cost-flow assumptions. The three most common cost-flow asumptions are:
- Average
- First-In, First-Out (FIFO)
- Last-In, First-Out (LIFO)
Determining cost flow by averaging the costs entails finding the average price of all units of a good and placing that as the current cost of a unit.
Determining cost flow via FIFO means that you assume units of a good are sold in the same order in which the merchandiser sold those goods, and cost them accordingly. This does not imply or require that the goods are actually sold in that order; it is assumed that the goods are indistinguishable from each other once they are in inventory.
Determining cost flow via LIFO means that you assume the most recently purchased goods are sold first, and cost them accordingly. Like FIFO systems, this may or may not reflect the actual order in which merchandise is sold; whether is does or not is irrelevent.
In general, the cost of a good rises more frequently than it falls. This being the case, a FIFO system will show the lowest cost of goods sold, and a LIFO system will show the highest cost of goods sold.