Cost Accounting Question.?

How should average costing for inventory be calculated. I鈥檓 specifically trying to determine if average costing is calculated based on the original cost you bought the item till present? Or should average costing only take into account activity for the current fiscal year.

It depends on what method you use in accounting for your inventories. There two systems offered in accounting for inventories - the periodic system and perpetual system.

The periodic systems calls for the physical counting of goods on hand at the end of the accounting period to determine quantities. This appraoch gives actual or physical inventories.

The perpetual system, on the other hand, requires the maintenance of records called stock cards that usually offer a running summary of the inventory inflow and outflow. Inventory increases and decreases are reflected in the stock cards and the resulting balance represents the inventory. This approach gives book or perpetual inventories.

IN COST FORMULAS for INVENTORIES, three methods are commonly applied, namely: the First In - First Out (FIFO), the Last in - First Out (LIFO) and the Weighted Average Method (the one in your question). However, the LIFO cost accounting is now prohibited under IAS 2 on Inventories (more info, visit www.iasplus.com). I do not know if the FASB still sanctions it.

The WEIGHTED AVERAGE METHOD is straight-forward and simply under the Periodic System however for the Perpetual System, the WEIGHTED MOVING AVERAGE must be used.

Periodic - Weighted Average

The cost of the beginning inventory plus the total cost of the purchases during the period is divided by the total units purchased plus those in the beginning inventory. Simply, the AVERAGE unit cost is computed by DIVIDING the total cost of goods available for sale (COGAS) by the total number of units available for sale.

Perpetual - Moving Average Method

Under this method, a new weighted average is computed after every purchase. Thus, the total cost of goods available for sale after every purchase is divided by the total unites available for sale at this time to get a new weighted average unit cost. This method requires the keeping of inventory stock cards in order to monitor the "moving" unit cost after every purchase.

This concepts are embodied, discussed, and fully illustrated (sample problems) in most basic and intermediate financial accounting texts.

Usually inventory is calculated based on historical cost, the original value of the inventory at time of purchase

that depends on the way you maintain ur acounts.. original cost method or written down value method..

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