Accounting for materials

Purchasing Materials

Manufacturing companies usually follow a specified purchasing process, with in-built

controls, when acquiring materials. Different departments within the business are
responsible for different steps in the process and for recording transactions in the
accounting system.

Key Point

MA assumes a computerised accounting system is used to record and control the flow of information in
transaction processing.

This means that the purchasing process is initiated, recorded, communicated, authorised, and
controlled within the computerised system.

Step Process stage Department Activity/Control

Request for Create and approve purchase

1 materials Stores requisition

2 Find supplier Purchasing Source suitable supplier

Purchasing
process
Create and approve purchase
3 Order goods Purchasing order

4 Receive goods Warehouse Record goods received

5 Pay for goods Finance Process and pay invoice

1. The stores department would first request the materials using an

authorised purchase requisition (purchase requisitions may come from other
departments directly as well).

2. The purchasing department would then source a suitable supplier for the materials,
usually from a verified list.
 3. The purchasing team would then order the goods from the external supplier using an
authorised purchase order.

4. Once the warehouse has received the goods, they will record the goods received in
the system.

5. Finally, the finance team would check the invoice against the purchase order and the
record of goods received and process the payment for the materials.

Accounting Entries for Materials

Movements of materials (buying materials, moving them from stores to production or back
from production to stores) are recorded in the materials control account.

Modern accounting systems use a common input data for all accounting purposes (financial
and cost accounting).

1.2.1 Materials Control Account

The materials control account records inventory movements in an organisation’s accounting

records, using double-entry, and shows the balance of inventory held by a company at a
specific point in time.

Material is an asset which is debited to the materials control account. Any transactions that
increase the asset’s value are debited to the inventory account, and those that decrease the
asset’s value are credited to the materials control account.

Opening inventory is a debit balance in the materials control account.

Each time an entry is made in the materials control account, detailed information in respect
of inventory valuation is simultaneously recorded.

Recording inventory is discussed further in section 1.4.

A summary of the transactions recorded in the materials control account are:

Transaction Debit Credit

Purchases Materials control Bank or payables

Issues to production (direct) Work-in-progress Materials control

Issues to production (indirect) Production overhead Materials control

 Returns from production Materials control Work-in-progress

Returns to supplier Payables Materials control

Differentiating direct materials and indirect materials is essential because they are
accounted for differently:

1.2.2 Accounting for Direct Materials

Direct materials would be directly accounted for in work-in-progress.

• Issue of direct materials to production

Dr Work-in-progress

Cr Materials control

1.2.3 Accounting for Indirect Materials

Indirect materials would be transferred into a production overheads account for subsequent
absorption into work-in-progress.

• Issue of Indirect materials to production

Dr Production overheads

Cr Materials control

1.2.4 Absorption of Production Overheads

Production overheads (which include all indirect production costs) would be absorbed into
production.

• Absorption of production overheads into production

Dr Work-in-progress

Cr Production overheads

1.2.5 Transfer To Finished Goods

Completed units would be transferred from work-in-progress to finished goods.

• Transfer to finished goods

Dr Finished goods

Cr Work-in-progress

1.2.6 Sale Of Finished Goods

The value of finished goods sold would be recognised as the cost of goods sold in the
statement of profit and loss.

• Sale of finished goods

Dr Cost of goods sold

Cr Finished goods

1.2.7 Material Control (T-account)

The accounting entries for the issue and return of materials can be displayed in a T-account
format.

Materials control

Dr $ Cr

Work-in-progress control X Work-in-progress control

(direct materials returned to stores) (direct materials issued)

Payables X Production overheads control

(materials purchased on credit) (indirect materials issued)

Payables

(materials returned to suppliers)

Example

The following is an example of some materials transactions:

Example

1. The opening balance of cotton in the materials control account is a $4,000 debit balance.

Materials control account – cotton

Opening balance 4,000

2. The fabric company Cotton Co supplies cotton to Furniture Co at the cost of $48,000. This transaction
increases the company’s assets as a debit in the materials control account.

Materials control account – cotton

$ $

Opening balance 4,000

Payables (materials purchased on credit) 48,000

3. A return of cotton to the suppliers because it was damaged, valued at $2,000, is posted as a
credit, which decreases the company’s assets.

Materials control account – cotton

Opening balance 4,000 Payables (returns to supplier)

Payables (materials purchased

on credit) 48,000

4. The production department requests cotton worth $38,000, which is recorded as a credit to the
materials control account.
 Example

Materials control account – cotton

Opening balance 4,000 Payables (returns to supplier)

Payables (materials purchased on Work-in-progress control (issued to

credit) 48,000 production)

5. The production department returns $3,500 of cotton to stores because it was not needed, which is
recorded as a debit.

Materials control account – cotton

Opening balance 4,000 Payables (returns to supplier)

Work-in-progress control (issued to

Payables (materials purchased on credit) 48,000 production)

Work-in-progress control (returns to

stores) 3,500

6. The closing balance of $15,500 at the end of the period is the balancing figure in the materials
control account and is the opening debit balance for the next period.

Materials control account – cotton

Opening balance 4,000 Payables (returns to supplier)

 Example

Payables (materials purchased on credit) 48,000 Work-in-progress control (issued to production)

Work-in-progress control (returns to stores) 3,500 Closing balance

55,500

Opening balance 15,500

Inventory Control and Costing System

Inventory control is managing the quantity of each item and knowing where it is. In addition,
it involves recording inventory received and issued and identifying any damage or
obsolescence.

Modern inventory systems use electronic methods to identify items of inventory. For
example, barcodes and scanners are often used, or QR codes (a type of barcode) and
smartphones.

The data from the inventory control system is usually part of the management information
system, which includes the costing system.

Modern data capture methods provide cost accountants with real-time inventory
information.

Once an order is placed, the dispatch of goods sold can be immediately updated by
warehouse staff using hand-held computers. Then, it is uploaded into the accounting system,
and the sale is recorded directly and without delay.

Cost accountants can run reports to find out,

• How many units have been sold that day or hour;

• How many units of raw materials have been issued to production, and at what price;

• How many units are remaining; and

• When the following order is due to be delivered.

Example

Furniture Co uses varnish to protect its wooden furniture products.

Note that these transactions are recorded and authorised directly within the computerised accounting
system. The information shown below will be presented and authorised digitally.

1. Requisitioning purchase of materials.

When Furniture Co’s stores department needs to buy new varnish, it must first complete a purchase
requisition and send it to the purchasing department.
Example

When the purchasing department receives the purchase requisition, it will authorise it and order the
materials.

2. Ordering materials

The purchasing department sends an authorised purchase order to the varnish suppliers.
Example

3. Receiving Materials

When the varnish is received into stores, the stores department will record the goods received into the
stores system and cross-check with the purchase order to check that the delivery matches the order.

4. Processing Payment

The purchasing department will compare the invoice from the supplier to the goods received records
and purchase order to verify its authenticity and authorise it for payment. When payment is due, the
accounts department will make the payment.
Example

5. Issuing Materials

The workshop may now request for the varnish to be issued by stores to the workshop by initiating a mater
requisition.
 Example

There are two other types of records relating to the movement of materials.

• A materials return – unused materials returned to the stores department are

recorded.

• A materials transfer – records of transfers of materials between different

departments.

Activity 1

Determine if the statement is true or false.

True or
Statement false

A materials requisition informs the company’s suppliers that it wishes to buy some
materials from them

Before a company pays its suppliers, the accounts department matches the goods
received with the materials requisition and the supplier's invoice.
 A purchase requisition is created by the production department when it requires more
materials.

*Please use the notes feature in the toolbar to help formulate your answer.

Statement True or false

False
A materials requisition informs the company’s
suppliers that it wishes to buy some materials A company sends a purchase order to
from them buy from suppliers.

False
Before a company pays its suppliers, the
accounts department matches the goods The accounts department matches the
received with the materials requisition and the goods received with the purchase order
supplier's invoice. and invoice received before payment.

False

A materials requisition is sent from the

A purchase requisition is created by the production department to the stores
production department when it requires more department when it requires more
materials. materials.

Recording Inventory

When materials are received in a company’s warehouse, they will be stored until the
production department needs them.

The inventory for each material will be recorded in the relevant materials control account
within the computerised accounting system.

Each time an entry is made in the materials control account, detailed information in respect
of inventory valuation is simultaneously recorded. In most accounting systems this
information can be accessed by ‘drilling down’ from the figures in the materials control
account.

An example of this detailed inventory valuation information (also called a stores ledger
account) for wood units at Furniture Co for June is shown below.
The inventory is valued using the cumulative weighted average method, which is discussed
later in this chapter.

Inventory Control

Inventory is one of the highest costs for many organisations. Any organisation with inventory
will undertake checks to ensure that the items they think are in their stores are there. It also
allows staff to check if there has been any damage to the inventory.

Stocktaking is one way in which organisations check inventory. It involves physically counting
the materials held and checking the figures against records detailing the quantity of
materials the organisation should have.

Example: Continuous Stocktaking

Note that an error still occurred and was discovered later in the day.

There are two methods of stocktaking:

• Periodic: Materials in the inventory are counted once a year.

• Continuous: Materials are checked regularly throughout the year (this method can
be less disruptive for organisations and more accurate).
Inventory Control

Inventory is one of the highest costs for many organisations. Any organisation with inventory
will undertake checks to ensure that the items they think are in their stores are there. It also
allows staff to check if there has been any damage to the inventory.

Stocktaking is one way in which organisations check inventory. It involves physically counting
the materials held and checking the figures against records detailing the quantity of
materials the organisation should have.

Example: Continuous Stocktaking

Note that an error still occurred and was discovered later in the day.

There are two methods of stocktaking:

• Periodic: Materials in the inventory are counted once a year.

• Continuous: Materials are checked regularly throughout the year (this method can
be less disruptive for organisations and more accurate).

Inventory Control

Inventory is one of the highest costs for many organisations. Any organisation with inventory
will undertake checks to ensure that the items they think are in their stores are there. It also
allows staff to check if there has been any damage to the inventory.

Stocktaking is one way in which organisations check inventory. It involves physically counting
the materials held and checking the figures against records detailing the quantity of
materials the organisation should have.
Example: Continuous Stocktaking

Note that an error still occurred and was discovered later in the day.
There are two methods of stocktaking:

• Periodic: Materials in the inventory are counted once a year.

• Continuous: Materials are checked regularly throughout the year (this method can
be less disruptive for organisations and more accurate).

Inventory Discrepancies

Any difference between the inventory records and monitoring inventory (a physical
stocktake) should be investigated.

A company must ensure that it has adequate controls in place to minimise differences
between physical inventory counts and inventory records. These differences are known as
discrepancies.

Inventory checks may reveal discrepancies between how much of an item is in inventory and
the amount shown in the inventory records.

There are many reasons for a discrepancy, and there are also ways to counteract the causes.

Reason for discrepancy Control

The quantity of goods delivered differs from what is All inventory should be counted as it is
shown on the delivery note. received and signed off.

The actual quantity of inventory issued to production Inventory issued to production should be
differs from that shown in the records. carefully counted and signed off.

Production returned excess inventory without any record All movements of inventory should be
being made in the system. recorded.

Security mechanisms and regular inventory

Theft of inventory by employees. checks will prevent this.

Inventory is damaged or obsolete and thrown away Damaged or obsolete items should be
without any record being made in the system. recorded.

1.6.1 Storing Goods

A sound warehousing system for keeping inventory accessible and secure should consider
the following:
 • Frequency of use and location in the warehouse

• Dangerous items and chemicals

• Special needs such as light, temperature, clean air, or hygiene requirements

• Security for valuable or high-risk items

Activity 2

Match the discrepancy to the appropriate control.

Control

Inventory issued to production

should be carefully counted and
Discrepancy approved.

The quantity of goods delivered differs from what is shown All inventory should be counted as it is
in the record of goods received. received and approved.

The actual quantity of inventory issued to production differs Warehouse security and frequent
from that shown in the records. stocktaking.

The production department returned unused inventory All movements of inventory

without any record being made in the system. should be recorded. Material
returns might be used.
Theft of inventory by employees.
Any items of inventory that are
Inventory is damaged or obsolete (out-of-date) and thrown damaged or out-of-date should
away without any record being made in the system. be recorded.

*Please use the notes feature in the toolbar to help formulate your answer.

Discrepancy Control

The quantity of goods delivered differs from what All inventory should be counted as it
is shown on the record of goods received. is received and approved.
 The actual quantity of inventory issued to Inventory issued to production
production differs from that shown in the should be carefully counted and
records. approved.

The production department returned unused All movements of inventory should

inventory without any record being made in the be recorded. Material returns might
system. be used.

Warehouse security and frequent

Theft of inventory by employees. stocktaking.

Inventory is damaged or obsolete (out-of-date) Any items of inventory that are

and thrown away without any record being made damaged or out-of-date should be
in the system. recorded.

Inventory Valuation Methods

Organisations may frequently buy the same item but pay varying prices at different times.

For example, a furniture manufacturer will buy a lot of cotton cloth at different times and
pay varying prices; it may be challenging to keep track of the value of fabric used in
production and the remainder in its warehouse.

So how much is the cloth in their warehouse worth?

There are several different methods of calculating inventory value:

• First-in, first-out (FIFO)

• Last-in, first-out (LIFO)

• Cumulative weighted average pricing (CWA)

• Periodic weighted average pricing (PWA)

• FIFO and LIFO

•
• FIFO assumes that the inventory purchased first is sold first. So, the materials
in stock at the end of a period are valued using the most recent prices paid to
suppliers.
• LIFO assumes that the inventory purchased last is sold. So, the materials in
stock at the end of a period are valued using the oldest unit prices paid to
suppliers.
 FIFO LIFO

Goods sold Oldest first Newest first

Closing inventory valued at Latest prices Oldest prices

FIFO Calculation

Example: FIFO Calculation

The following material movements have been recorded:

Quantity Value ($) Balance (Units) Balance ($)

1 May Raw materials opening balance 20 20 100

12 May Receipt of raw materials 30 180 50 280

13 May Issue of raw materials (25) 25

20 May Receipt of raw materials 20 160 45

26 May Issue of raw materials (35) 10

Closing balance 10

Compute the value of issues and closing inventory for May using FIFO.

Answer:

Value of purchase/issue Closing inventory balance

$ per Value Balance $ per Balance

Date transaction Quantity unit ($) (Units) unit ($)

Raw materials opening

1 May balance 20 20 5 100
 Example: FIFO Calculation

12 Receipt of raw
May materials 30 6 180 20 5 100

30 6 180

Issue of raw materials

13
May (25 units) (20) 5 100 NIL 5 NIL

(5) 6 30 25 6 150

(25) 130

20 Receipt of raw
May materials 20 8 160 25 6 150

20 8 160

Issue of raw materials

26
May (35 units) (25) 6 150 NIL 6 NIL

(10) 8 80 10 8 80

(35) 230

Closing balance 10 8 80

Observations:

• Purchases are reflected separately from existing inventory, as their purchase prices may differ.

• Issues are always subtracted from the earliest inventory and valued at the earlier price.

• When earlier inventory is exhausted, the issue is from the preceding earliest inventory.

• Closing inventory is valued at the latest prices.

LIFO Calculation
Example: LIFO Calculation

The following material movements have been recorded:

Quantity Value ($) Balance (Units) Balance ($)

1 May Raw materials opening balance 20 20 100

12 May Receipt of raw materials 30 180 50 280

13 May Issue of raw materials (25) 25

20 May Receipt of raw materials 20 160 45

26 May Issue of raw materials (35) 10

Closing balance 10

Compute the value of issues and closing inventory for May using LIFO.

Answer:

Value of purchase/issue Closing inventory balance

$ per Value Balance $ per Balance

Date transaction Quantity unit ($) (Units) unit ($)

Raw materials opening

20 5 100
1 May balance 20

12 Receipt of raw
May materials 30 6 180 20 5 100

30 6 180
 Example: LIFO Calculation

Issue of raw materials

13 20 5 100
May (25 units)

(25) 6 150 5 6 30

(25) 150

20 Receipt of raw
20 8 160 20 5 100
May materials

5 6 30

20 8 160

Issue of raw materials

26 10 5 50 10 5 50
May (35 units)

5 6 30 NIL 6 NIL

20 8 160 NIL 8 NIL

35 240

Closing balance 10 5 50

Observations:

• Purchases are reflected separately from existing inventory, as their purchase prices may differ.

• Issues are always subtracted from the latest inventory and valued at the latest price.

• When the latest inventory is exhausted, the issue is from the earlier inventory.

• Closing inventory is valued at the earliest prices.

Weighted Average Methods (CWA and PWA)

The cumulative weighted average approach calculates the average cost per unit every time
a new material receipt occurs by dividing the total cost of held inventory by the total
number of units in stock. This price is used to value all issues to production until another
delivery is received. The closing inventory is valued using the most recently calculated
weighted average price.

The periodic weighted average calculates a single weighted average cost per unit at the end
of each accounting period (rather than whenever inventory is purchased). This single
weighted average price is used to value all the issues to production and the closing inventory
for the period.

(COST OF ALL RECEIPTS FOR THE PERIOD + COST OF OPENING INVENTORY)

÷ (UNITS RECEIVED FOR THE PERIOD + UNITS OF OPENING INVENTORY)

= PERIODIC WEIGHTED AVERAGE PRICE

CWA PWA

Frequency of price
calculation Every time upon receipt of new material At the end of the period.

At the latest calculated weighted At the average price for the

Price of issued material average price period.

CWA Calculation

Example: CWA Calculation

The following material movements have been recorded:

Quantity Value ($) Balance (Units) Balance ($)

1 May Raw materials opening balance 20 20 100

12 May Receipt of raw materials 30 180 50 280

Example: CWA Calculation

13 May Issue of raw materials (25) 25

20 May Receipt of raw materials 20 160 45

26 May Issue of raw materials (35) 10

Closing balance 10

Compute the value of issues and closing inventory for May using CWA.

Answer:

Value of purchase/issue Closing inventory balance

$ per Value Balance $ per Balance

Date transaction Quantity unit ($) (Units) unit ($)

Raw materials opening

1 May balance 20 20 5.00 100.00

12 Receipt of raw
May materials 30 6.00 180.00 50 5.60 280.00

Issue of raw materials

13
May (25 units) 25 5.60 140.00 25 5.60 140.00

20 Receipt of raw
May materials 20 8.00 160.00 45 6.67 300.00

Issue of raw materials

26
May (35 units) 35 6.67 233.45 10 6.67 66.55

Closing balance 10 6.67 66.55

 Example: CWA Calculation

Observations:

• Purchases are aggregated with existing inventory, and a new weighted average price is computed.

• Issues are always valued at the latest weighted average price.

• Closing inventory is valued at the latest weighted average.

PWA Calculation

Example: PWA Calculation

The following material movements have been recorded:

Quantity Value ($) Balance (Units) Balance ($)

1 May Raw materials opening balance 20 20 100

12 May Receipt of raw materials 30 180 50 280

13 May Issue of raw materials (25) 25

20 May Receipt of raw materials 20 160 45

26 May Issue of raw materials (35) 10

Closing balance 10

Compute the value of issues and closing inventory for May using PWA.

Answer:

Quantity Value ($)

1 May Raw materials opening balance 20 100

 Example: PWA Calculation

12 May Receipt of raw materials 30 180

20 May Receipt of raw materials 20 160

Total 70 440

PWA price per unit = $440 ÷ 70

PWA price per unit = $6.29

Value of closing inventory = $6.29 × 10

Value of closing inventory = $62.86

Value of issues:

Quantity $ per unit $

13 May Issue of raw materials (25) 6.29 157.14

26 May Issue of raw materials (35) 6.29 220.15

Observations:

• Purchases are aggregated with opening inventory, and a periodic weighted average (PWA) price
is computed for the period.

• Issues are valued at the PWA price

• Closing inventory is valued at the PWA price.

Practice

Activity 3

Furniture Co has had three deliveries of cotton in the last month:

 Units $ per unit

1 January 50 70

15 January 20 85

30 January 35 80

On 2 January, 30 units were issued (from Furniture Co's storage warehouse) to production.

On 16 January, 30 units were issued to production.

On 31 January, there were 45 units left in inventory.

Calculate the value of the 45 units in closing inventory using the following methods:

1. FIFO

2. LIFO

3. Cumulative weighted average

4. Periodic weighted average

*Please use the notes feature in the toolbar to help formulate your answer.

1. FIFO

2.

Value of purchase/issue Closing inventory balance

$ per Value Balance $ per

Date transaction Quantity unit ($) (Units) unit Balance

1 Receipt of raw
January materials 50 70 3,500 50 70 3,500

Issue of raw
materials
2
January (30 units) (30) 70 2,100 20 70 1,400
 15 Receipt of raw
January materials 20 85 1,700 20 70 1,400

20 85 1,700

Issue of raw
materials
16
January (30 units) (20) 70 1,400 NIL 70 NIL

(10) 85 850 10 85 850

(30) 2,250

30 Receipt of raw
35 80 2,800 10 85 850
January materials

35 80 2,800

31
45 3,650
January Closing balance

1. LIFO

2.

Value of purchase/issue Closing inventory balance

$ per Value Balance $ per

Date transaction Quantity unit ($) (Units) unit Balance ($)

1 Receipt of raw
January materials 50 70 3,500 50 70 3,500

Issue of raw
materials
2
January (30 units) (30) 70 2,100 20 70 1,400
 15 Receipt of raw
January materials 20 85 1,700 20 70 1,400

20 85 1,700

Issue of raw
materials
16
January (30 units) (10) 70 700 10 70 700

(20) 85 1,700 NIL 85 NIL

(30) 2,400

30 Receipt of raw
35 80 2,800 10 70 700
January materials

35 80 2,800

31 Closing
45 3,500
January balance

1. Cumulative average

2.

Value of purchase/issue Closing inventory balance

$ per Value Balance

Date transaction Quantity unit ($) (Units) $ per unit

1 Receipt of raw
January materials 50 70 3,500 50 70

Issue of raw
materials
2
January (30 units) (30) 70 2,100 20 70.00
 15 Receipt of raw
January materials 20 85 1,700 40 77.50

Issue of raw
materials
16
January (30 units) (30) 77.5 2325 10 77.50

30 Receipt of raw
35 80 2,800 45 79.44
January materials

31
45
January Closing balance

3. Periodic average

Issue cost per unit

= (3,500 + 1,700 + 2,800) / (50 + 20 + 35)

= $8,000 / 105

= 76.19 per unit

Value of closing balance

= $76.19 × 45 units

=$3428.55

Activity 4

Furniture Co inventory details for June 20X1

Quantity Unit cost

(Units) $

Opening inventory 1 June 20 50.00

Purchases 5 June 40 55.00

 Issues 7 June 45

Purchases 10 June 50 45.00

Issues 12 June 35

Issues 17 June 15

Purchases 25 June 50 50.00

Closing inventory 30 June 65

Calculate the value of the 65 units in closing inventory at the end of June 20X1 using the
following methods:

1. FIFO

2. LIFO

3. Cumulative weighted average

4. Periodic weighted average

*Please use the notes feature in the toolbar to help formulate your answer.

1. FIFO

The value of the 65 units of closing inventory is $3,175:

50 units at $50 per unit (the cost of the most recently purchased units in inventory)

15 units at $45 per unit (the cost of the second most recently purchased units in inventory)

1. LIFO

The value of the 65 units of closing inventory is $3,250:

65 units at $50 per unit (the cost of the remaining oldest units in inventory and the latest
purchase)

1. Cumulative weighted average

2.
 Value of purchase/issue Closing inventory balance

$ per Value Balance Balance

Date transaction Quantity unit ($) (Units) $ per unit ($)

1 Opening
June Inventory 20 50.00 1,000

5
June Purchases 40 55.00 2,200 60 53.33 3,200

7
June Issues (45) 53.33 2,400 15 53.33 800

10
June Purchases 50 45.00 2,250 65 46.92 3,050

12
June Issues (35) 46.92 1,642 30 46.92 1,408

17
June Issues (15) 46.92 704 15 49.92 704

25
June Purchases 50 50.00 2,500 65 49.29 3,204

30 Closing
June balance 65 3,204

1. Periodic weighted average

Issue cost per unit

= (1,000 + 2,200 + 2,250 + 2,500) / (20 + 40 + 50 + 50)

= $7,950 / 160

= 49.69 per unit

Value of closing balance

= $49.69 × 65 units

=$3,229.85

Activity 5

Furniture Co has had three metal deliveries during May and two issues to the sofa
production department.

Date Units received Units issued

1 May 25 at $100 each

2 May 10

15 May 10 at $105 each

16 May 20

30 May 10 at $120 each

Calculate the value of the material issues and closing inventory using the following:

1. FIFO

2. LIFO

3. Periodic weighted average

4. Cumulative weighted average

*Please use the notes feature in the toolbar to help formulate your answer.

1. FIFO

On 1 May, 25 units were received at a value of $100 each

On 2 May

10 units were issued to production at $100 per unit

15 units remained in inventory

Total value of issue = 10 × $100 = $1,000

On 15 May, 10 units were received at a value of $105 each

On 16 May

20 units were issued to production

15 of these units were valued at $100 per unit (the cost of the oldest units in inventory, from
the 1 May purchase) = $1,500

5 of these units (from the 15 May purchase) were valued at $105 per unit (the cost of the
most recent units in inventory from the 15 May purchase) = $525

Total value of issue = $1,500 + $525 = $2,025

On 30 May, 10 units were received at a value of $120 each

Value of the 15 units of closing inventory

5 units at $105 per unit (the cost of the units purchased on 15 May purchase) = $525

10 units at $120 per unit (the cost of the most recent units in inventory from the 30 May
purchase) = $1,200

Total value of closing inventory = $(525 + 1,200) = $1,725

Check this as follows:

Total receipts:

1 May = 25 × $100 = $2,500

15 May = 10 × $105 = $1,050

30 May = 10 × $120) = $1,200

Total receipts = $(2,500 + 1,050 + 1,200) = $4,750

Total value of issues: 2 May = $1,000 and 16 May = $2,025 = $3,025

Value of inventory at 30 May = total value of receipts − total value of issues

= $(4,750 − 3,025) = $1,725

2. LIFO

On 1 May, 25 units were received at a value of $100 each

On 2 May

10 units were issued to production at $100 per unit

Total value of issue = 10 × $100 = $1,000

15 units remained in inventory

On 15 May, 10 units were received at a value of $105 each

On 16 May

20 units were issued to production

10 of these units were valued at $105 per unit (the cost of the newest units in inventory
from the 15 May purchase) = $1,050

10 of these units (from the 1 May purchase) were valued at $100 per unit (the cost of the
second oldest units in inventory, from the 1 May purchase) = $1,000

Total value of issue = $1,050 + $1,000 = $2,050

On 30 May, 10 units were received at a value of $120 each

Value of the 15 units of closing inventory

5 units at $100 per unit (the cost of the oldest units in inventory from the 1 May purchase) =
$500

10 units at $120 per unit (the cost of the most recent units in inventory from the 30 May
purchase) = $1,200

Total value of closing inventory = $(500 + 1,200) = $1,700

Check this as follows:

Total receipts:

1 May = 25 × $100 = $2,500

15 May = 10 × $105 = $1,050

30 May = 10 × $120) = $1,020

Total receipts = $(2,500 + 1,050 + 1,020) = $4,750

Total value of issues: (2 May = $1,000) and (16 May = $2,050) = $3,050

Value of inventory at 30 May = total value of receipts − total value of issues

= $(4,750 − 3,050) = $1,700

3. Periodic weighted average

This method involves totalling the value of the units received and dividing this by the total
number of units received.
Total value of units received = (25 × $100) + (10 × $105) + (10 × $120) = $(2,500 + 1,050 +
1,200) = $4,750

Total number of units received = 25 + 10 + 10 = 45

Average issue price = $4,750/45 = $105.56 per unit

The value of the 15 units of closing inventory is 15 × $105.56 = $1,583.33

4. Cumulative weighted average

Date Metal Metal Balance of Total Average

units units metal units inventory cost per
received issued in inventory value ($) unit ($)

1 May 25 25 2,500 100

2 May 10 (1,000) 100

15 1,500 100

15 May 10 1,050 105

25 2,550 102

16 May 20 (2,040) 102

5 510 102

30 May 10 1,200 120

Closing 15 1,710 114

inventory