Detailed Notes on Weighted Average Cost and Inventory Management

Overview of Inventory and Cost Calculations

• Focus on Inventory and the Weighted Average Cost Formula.
• Importance of calculating Cost of Goods Sold (COGS) and maintaining accurate Inventory Values in a perpetual inventory system.

Journal Entries in a Perpetual Inventory System

• Two Primary Journal Entries:
  • Recording the Sale:
  • Debit Cash or Accounts Receivable
  • Credit Sales
  • Value based on the selling price of items (e.g., $8.00 for a bag of candies).
  • Recording Inventory Changes:
  • Debit COGS
  • Credit Merchandise Inventory
  • Value based on weighted average cost of items sold.

Definition of Weighted Average Cost

• Used for items that are indistinguishable, such as bulk items (e.g. candies).
• Aim: Calculate the average cost per unit before making sales.

Example Scenario: Jordy and Company

• Beginning Inventory (November 1):

  • 10 units at $5.00 each
  • Total Cost: $50

• Purchases:

  • November 4: 20 units at $5.50 (Total: $110)
  • November 7: 20 units at $6.00 (Total: $120)

Calculation of Average Cost Per Unit

Step-by-Step Calculation:

1. Calculate Total Costs and Units:

   • For November 4 Purchase:
     • Total inventory = 10 units + 20 units = 30 units
     • Total cost = $50 + $110 = $160
     • Average Cost/unit = ( \frac{\text{Total Cost}}{\text{Total Units}} = \frac{160}{30} = 5.33 )

2. For November 7 Purchase:

   • Total inventory = 30 units + 20 units = 50 units
   • Total cost = $160 + $120 = $280
   • Average Cost/unit = ( \frac{280}{50} = 5.60 )

Sales Transactions

• November 10 Sale:

  • Sold 10 units at $8.00:
  • Revenue from Sale = 10 × $8 = $80
  • COGS = 10 units × $5.60 = $56.

• November 12 Sale:

  • Sold 30 units at $8.00:
  • Revenue from Sale = 30 × $8 = $240
  • COGS = 30 units × $5.60 = $168.

Summary of Inventory Movement

• Goods Available for Sale:
  • 50 units valued at $280.
• Total Sold: 40 units valued at $224.
• Ending Inventory: 10 units valued at $56.

Journal Entries for Purchases and Sales

• November 4 Purchase Entry:

  • Debit Merchandise Inventory: $110
  • Credit Accounts Payable

• November 12 Sales Entry:

  • First Entry:
  • Debit Accounts Receivable: $240
  • Credit Sales
  • Second Entry:
  • Debit COGS: $168
  • Credit Merchandise Inventory

Conclusion

• Importance of calculating weighted average cost before each sale.
• Ensures accurate reflection of inventory costs and maintains precise financial records.