Tuesday, 19 December 2006

Cost Flow Assumption

1) The major challenge in Inventory Accounting arise when:
a) Acquisition unit cost fluctuate over tme.
b) Individual item is usually cannot be traced from which PO when the Item is removed from Inventory. This means the actual cost of the Item removed from the Inventory cannot be determied.

2) This above challenge cause 2 problems:
a) Not able to determine the cost of Item removed from Inventory.
b) Not able to determine the cost of Item on hand in the Inventory.

3) Physical idenfication of items is impractical because new items purchased will be mixed with the old items when shelving and storing.

4) Because of the above challenges and problems, assumption is needed to determine the cost of goods sold and the cost of remaining amount. The most common assumption / costing methods are:
a) First In First Out
b) Last In First Out
c) Weighted Average
- Weighted Average calculate the Average cost on each purchase. The average price will be used for all withdrawal of inventory until the next purchase is made.

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