There are four methods of assigning costs of inventory and costs of goods sold:
Specific Identification: If we can identify each item in inventory with a specific purchase and invoice, we can use this method to assign actual cost of units sold to cost of goods sold and leave actual cost of units on hand in the inventory count.
FIFO: When sales occur, the costs of the earliest purchases are charged to cost of goods sold, leaving costs of most recent purchases in inventory.
LIFO: When sales occur, the costs of the most recent purchases are charged to cost of good sold, leaving costs of earliest purchases in inventory.
Weighted Average (also called Average Cost): With this method we must compute the weighted average cost per unit of inventory at the time of each sale (cost of goods available divided by units available). We charge to cost of good sold this weighted average cost per unit times units sold.
How does the perpectual inventory method differ from the periodic inventory method? Explain each method with one example to substantiate your answer.
When and how do you value inventory using the Lower of Cost or Market (LCM) method? Describe examples to substantiate your answer.
How may a healthcare organization’s choice of inventory costing methods affect its financial outcomes? Use your chosen hospital from Module 1 as an example to substantiate your answer.