Costing methodologies

In this post, the reader can get the deep insight about some widely used costing methodologies. In this section we don’t want our readers to be flooded with the philosophies of the costing. So, we are handling this with some scenarios and examples that would help you to understand the concept rather than reading between the lines of costing philosophies.

Following are the most widely used costing methodologies,

1. Weighted Average

2. First In First Out

3. Last In First Out

4. Standard Cost

Scenario:

Purchase 1:

Quantity of Pens Purchased = 100 Pcs

Unit Price of Each Pen = 10 USD

Total Price of Purchased Pens = 100 X 10 = 1000 USD

Purchase 2:

Quantity of Pens Purchased = 150 Pcs

Unit Price of Each Pen = 20 USD

Total Price of Purchased Pens = 150 X 20 = 3000 USD

Total Pens Purchased = 250 Pens.

Total Amount spent for purchasing 250 Pens = 4000

Now the above scenario will be simulated in the different type of costing methodologies.

Weighted Average Method:

Consider 50 pens were sold from Purchase 1

Cost price of a Pen = Total Amount spent for purchasing all pens/Total Quantity of pens Purchased

Cost price of a pen = 4000/250 = 16 USD

Cost of Goods Sold (COGS) = Cost price of a Pen X Quantity of pen sold = 16 X 50 = 800 USD

Remaining Inventory = Cost price of a pen X Remaining Quantity of a Pens

Remaining Inventory = 16 X 200 = 3200 USD

First In First Out:

Consider 60 Pens were sold from the Purchase 1

Cost of Goods Sold = (60 Pens X 10 USD) = 600 USD

Remaining Inventory = (40 Pens X 10 USD) + (150 Pens X 20 USD) = 3400

Last In First Out:

Consider 50 Pens were sold from the Purchase 2. This is because LIFO method will always issue the Latest receipt quantities

Cost of Goods Sold = (50 Pens X 20 USD) = 1000 USD

Remaining Inventory = (100 Pens X 10 USD) + (100 Pens X 20 USD) = 3000 USD

That’s all about the basic costing methodologies. Happy Consulting!!!