Cost assignment methods

Question 1

What is first in first out (FIFO) and how is it applied to different trasactions

Answer 1

• Based on the assumption that the inventory that enters the business first will be the first to leave
• Used when it is impossible or impracical to identify the cost of individual units. Eg. a supermarket

> Cash / credit purchase -> Unit cost will appea on the source document
Cash / credit sale / drawing of inventory / advertising using inventory -> FIFO applied
Sales return -> Follow FIFO and assume that the last inventory out is the first back in (LOFI)
Purchase return -> The unit cost is identified by supplier
Inventory loss -> The first inventory in will be the first to be lost
Inventory gain -> The last unit in will be the same as the gained

Question 2

What is identified cost (IC) and how is it applied to different transactions

Answer 2

• The actual cost price of the inventory that is purchased or sold is identified and recorded
• It requires the business to be able to track the price of an individual item unitl it is sold

> Cash / credit purchase -> Unit cost appeas on the source document
Cash / credit sale / drwaing of inventory / advertising using inventory -> The unit cost for each item is identified
Sales return -> The cost of each item will be identified on the business docuent or inventory card
Purchase return -> The unit cost will be identified in the credit note by the supplier
Inventory loss -> The unit cost will be identified
Inventory gain -> The unit cost will be identified

Question 3

What is inventory / physical count

Answer 3

The process of counting every item of inventory on hand to verify the accuracy of the inventory cards and to detect and loss or gain

Question 4

What is inventory loss

Answer 4

The expense that occurs when the physical count shows less inventory than is shown on the inventory card

Question 5

What is inventory gain

Answer 5

A revenue that occurs when the physical count shows more inventory on hand than is shown in the inventory card

Question 6

Reasons for inventory loss

Answer 6

Theft
Damage 
Oversupply to customers
Undersupply by suppliers
Recording error

Question 7

Reasons for inventory gain

Answer 7

Undersupply to customer
Oversupply by suppliers
Recording error