Wednesday, 20 February 2013

Determining Cost of Sales under Periodic System


Periodic System of Inventory.

 The most direct means of determining the physical quantity of inventory on hand is to count it. An inventory system that establishes quantities on the basis of recurring counts is known as a periodic system. After establishing quantities on hand, each unit is multiplied by its unit cost to determine its inventory value. Cost of sales is a residual amount obtained by subtracting the ending inventory amount from the cost of goods available for sale:

Beginning Inventory
+ Purchases and Costs of Production
Goods Available for Sale
Ending Inventory
Cost of Sales

A periodic system is most likely to be used by a small company or for a department with low-value items that do not warrant more elaborate control procedures. A periodic system also is used for inventories for which reliable usage data cannot practicably be generated (e.g., certain supplies and extractive materials).

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