Accounting has it three ways keep inventory. These three types are first in-first out, last in first out and weighted average. First out is also known as a FIFO only at first. The first in first out method is relatively simple. If a sale is the cost of the first units purchased the manufacturing costs charged to account. Often, you find this method with things like TV. TV sellers want to get the oldest models, so that they are not to end up with the same old technology off the shelf as soon as possible. The last in the first is method, or more commonly known as LIFO, the exact opposite of FIFO. When calculating method for the inventory to keep, if a sale takes place, the last in first out you the most inventory at the cost of selling account were bought recently. The third-most common way in weighted or generally to keep referred to as average costs. Average cost is relatively easy to calculate. Take the total cost of the inventory and parts of it by the total number of units in inventory. This gives you an average cost for everything so that you may require in your inventory that the account is a fixed amount for each unit production cost, which is sold.
Keep as a way, these three different types to demonstrate inventory, I’ll use a candle company as an example. The candle company assume that three separate shipments of candles in calls. The first shipment contained ten candles at a price of $20. Twenty candles $15 contain the second delivery. The last show contained thirty candles at $10. What manner of computing the cost is best sold for this company make they were forty candles sell?
If you method would use the first in first out charge ($ 20 * 10) + ($ 15 * 15) + ($ 10 * 10) that would give you a total $600. The reason for this is because you would use the forty units of inventory, which were the first purchased. In other words, you use the oldest possible inventory. If you have been using the last in first out method would you calculate ($ 10 * 30) + ($ 15 * 10). In this case, you use the inventory which was purchased before recently first. In calculating the weighted cost of capital of the inventory, you can calculate the total cost of the inventory and divide by the number of units. In this example, you would ($ 20 * 10) + ($ 15 * 20) + ($ 10 * 30) which is equivalent to $800. Then divide by the total portfolio, which is 60. This gives you an average of $13,33. Several of the average cost price of 40, will total $533,33 there.
As you, this demonstration can see, gives each method as a whole you different after forty units sold. Finally all would sell your inventory, then would all but sometimes compensate for company like to frontload or keep on loading, that your account costs. It is strictly to the company and their preferences.