Q. How to determine inventory cost?

To place the proper evaluation on inventory a business must answer the question: Which costs must be included in inventory cost? After that when the business purchases identical goods at different costs it must answer the question: Which cost must be assigned to the items sold? In this section you study how accountants answer these questions.

The costs incorporated in inventory depend on two variables such as quantity and price. To turn up at a current inventory figure companies should begin with an accurate physical count of inventory items. They multiply the quantity of inventory with the unit cost to compute the cost of ending inventory. This section discusses the taking of a physical inventory and the methods of costing the physical inventory under both periodic and perpetual inventory procedures. The remainder of the section discusses departures from the cost basis of inventory measurement.

As briefly described in section to take a physical inventory a company have to weigh, count, measure or estimate the physical quantities of the goods on hand. For illustration a clothing store may count its suits a hardware store may weigh washers, bolts and nails and a gasoline company may measure gasoline in storage tanks and a lumberyard may estimate quantities of coal, lumber or other bulky materials. During the taking of a physical inventory the goal should be accuracy.