Is lifo, fifo, and weighted average the same as raw materials, work in process, and finished goods

Question

Difference from managerial accounting inventory cost from accounting 1 inventory cost. Are they still considered the same? If not what concepts change. 

Answer 1

First, re-read the difference between cost and expense. The first time you saw the statement you most likely did not make sense of the statement. Why the difference?
When you credit cash, yes put it on the right side, what is the corresponding debit. If you use it right now it is an expense. If you use it latter it is a cost. If you put $25 of gas in a delivery truck and use it up before the end of the accounting period it is an expense.

Fuel expense $25
             Cash        $25

If United Airlines buys $25,000 of jet fuel for inventory it is a cost. We do not know when it will be used.

 

   

Fuel Inventory Supply           $25,000
          Accounts Payable                   $25,000

 

At the end of the accounting period you have $7,000 of the Fuel left

Fuel Expense              $18,000
        Fuel Inventory Supply        $18,000
That is an expired cost.

Got the cost vs. expense concept?

Now imagine a manufacturing facility with three buildings.
The building in the back is the raw material wherehouse. It is served by rail and trucks. The “stuff” shows up it is Raw Material. It sits in the back building until it is needed by the middle building. This is a cost on the balance sheet.

 

Once the stuff moves to the middle building it is Work in Process (WIP). It is now raw any more it has direst labor and overhead included, (We will get to overhead latter). It still is a cost on the balance sheet.

We are assembling raw material “stuff” into finished product we can sell.

Once we are finished it is Finished Goods. It moves to the third building, the finished goods warehouse.

Once it leaves it is now accounts receivable. Now the costs have expired. It is Cost of Goods Sold (COGS). That is on the income statement. COGS is a debit, revenue is a credit.

Inventory= asset
Raw Material > Work in Process (WIP)> Finished goods> Accounts receivable >cash

What do we charge out customers? The sales price. That has nothing to do with our cost. It has to do with what our competitors are charging. What we paid is of no concern to our customers.

What do we charge ourselves? We can think in terms of FIFO or LIFO. In most cases you tell the fork lift operator and warehousemen move the oldest first. If it is lettuce or fish it better work that way.

What do you tell the accountant? Expense the oldest cost or the most recent cost?

Let’s assume all the finished goods are on pallets. 100 units of finished goods on 7 pallets, total 700 units.
Pallet 1 100 at $60 each total $6,000
Pallet 2 100 at $62 each Total $6,200
Pallet 3 100 at $64 Each Total $6,400
Pallet 4 100 at $66 each Total $6,600
Pallet 5 100 at $70 each Total $7,000
Pallet 6 100 at $72 each Total $7,200
Pallet 7 100 at $75 each Total $7,500

You sold 575 units at $100 each, total revenue $5,750
What was the cost?
FIFO expense the oldest first
100 at $6,000
100 At $6,200
100 at $6,400
100 at $6,600
100 at $7,000
75 at $5,625 (you took only 75 of the 100 at $75)

LIFO Expense the most recent cost from our suppliers
100 at $7,500
100 at $7,200
100 at $7,000
100 at $6,600
100 at $6,400
75 at $4,650 (you only took 75 of the $62 batch)

Revenue is the same. LIFO looks like it cost you more. (We will talk about the tax advantage later)
Costs are rising. Your competitors have not raised their prices. You are stuck. LIFO is an early warning signal. Your inventory will be undervalued by LIFO but you will see the problem quicker.

FIFO cost= $37,825

LIFO cost = $39,350

Answer 2

These concepts are the same whether in a beginning accounting or managerial accounting course.

 

"Raw materials", "work in process" and "finished goods" are inventory accounts.

 

LIFO (last-in, first-out), FIFO (first-in, first-out) and weighted average are calculations using cost-flow assumptions (as opposed to physical flow). For example, a grocery store uses the FIFO method, even though the physical flow may be that the latest arrival of milk are the first milk items (or LIFO) that customers grab.