AMIS 525

FIFO, LIFO and weighted average inventory cost flow models in manufacturing accounting

FM cost varies per unit [fM] as production levels change but does not change in total and does not change as sales levels change. vM cost is the same amount per unit at all production levels and sales levels but varies in total [V M]. FNP cost does not vary per unit as production levels change but does vary per unit as sales levels change. vNP cost is the same amount per unit at all production levels and sales levels.

Assumptions: process manufacturing, single product company constants: [relevant range] FM FNP vM vNP p CQ

periodic [end-of-period] inventory accounting method WIP balance = 0 at end of each period, over / under applied overhead = 0 each period

units PQ <= CQ BQ + PQ >= SQ EQ = BQ + PQ - SQ BQ, PQ, SQ, EQ >= 0 cannot produce more than capacity cannot sell more than is available to sell BASE relationship non-negative amounts only

I = R - CGS - NPC EQC = [ c M * EQ ] c M will vary with inventory method f M will vary with production level

cM = fM =

vM + fM F M / PQ

Simple situation [first period of operations or, more generally, any period with BQ = 0 and SQ = PQ] cost flow methods [FIFO, LIFO, average cost] irrelevant because BQ = 0 I = [ p * SQ ] - [ c M * SQ ] - [ v NP * SQ ] - F NP I = [ p * SQ ] - [ c M * SQ ] - [ v NP * SQ ] - F NP I = [ p * SQ ] - [ [ v M + f M ] * SQ ] - [ v NP * SQ ] - F NP I = [ p * SQ ] - [ v M * SQ ] - [ f M * SQ ] - [ v NP * SQ ] - F NP

I = [ p * SQ ] if
Q = SQ = PQ v = [ v M + v NP ] F = F M + F NP cm = [ p - v]

[ [ v M * SQ ] + [ [ F M / PQ ] * SQ ] ]
I=[p*Q]I=[p*Q][ [ vM * Q ] + [ [ FM / Q ] * Q ] ] [ [ vM * Q ] + FM ]

- [ v NP * SQ ] - F NP
- [ v NP * Q ] - F NP

- [ v NP * Q ] - F NP

I = [ p * Q ] - [ v M * Q ] - [ v NP * Q ] - F M - F NP I = [ p * Q ] - [ v M * Q ] - [ v NP * Q ] - F M - F NP I = [ p - v M - v NP ] * Q ] - F M - F NP I = [ p - v ] * Q ] - F M - F NP I = [ cm * Q ] - F

EQC= [ c M * EQ ] EQC= [ v M * EQ ] + [ [ F M / PQ ] * EQ ]

EQC= [ v M * [ PQ - SQ ] ] + [ [ F M / PQ ] * [ PQ - SQ ] ]
if
EQ = PQ - SQ PQ = SQ EQ = 0

EQC = 0

General situation [not first period of operations or more generally BQ > 0 and SQ >, =,< PQ] and two definitions of income [simplification possible if PQ constant] periodic inventory accounting method for all cost flow methods [FIFO, LIFO, average cost] Full costing

FCI = [ p * SQ ] - [ v NP * SQ ] - F NP - [ v M * SQ] - [ see below ]

FIFO
assume SQ > BQ

[ [ F M / PQ

t-1

] * BQ ] + [ [ F M / PQ ] * [ SQ - BQ ] ]

WA

average

f M * SQ ]
t

average

f M = [ BQF + F M ] / [ BQ + PQ ]

BQF = beginning quantity fixed cost

LIFO
assume only one inventory layer in BQ SQ > PQ

[ [ F M / PQ t - 1 ] * [ SQ - PQ ] ] + [ [ F M / PQ t ] * PQ ] [ F M / PQ t ] * SQ

SQ < PQ

Variable Costing

VCI = [ p * SQ ] - [ v M * SQ ] - [ v NP * SQ ] - F NP - F M
Full costing

EQC = [ v M * EQ ] + [ see below ]

EQ = BQ + PQ - SQ

[ v M * [ BQ + PQ - SQ ] ] + [ see below ] FIFO

assume SQ > BQ

[ F M / PQ ] * EQ [ F M / PQ t ] * [ BQ + PQ - SQ ] [ [
average average

WA

f M * EQ ] f M * [ BQ + PQ - SQ ] ]

LIFO
assume only one inventory layer in BQ SQ > PQ

[ F M / PQ t - 1 ] * EQ [ F M / PQ t - 1 ] * [ BQ + PQ - SQ ] [ [ F M / PQ
t-1

SQ < PQ

] * BQ ] + [ [ F M / PQ ] * [ PQ - SQ ] ]

Variable Costing

EQC = [ v M * EQ ]
v M * [ BQ + PQ - SQ ]

EQ = BQ + PQ - SQ