In the Retail business Inventory is the goods that are held in stock to be sold.
There are two types of Inventory Systems namely Perpetual Inventory and Periodic Inventory.
Here the Cost of Goods Sold (COGS) for a given period was calculated using the Opening Inventory value and the Closing Inventory value based on a physical count. This was before the days of sophisticated Software Systems where all calculations were done manually and it was too much trouble calculate the COGS for each individual sale.
COGS = Opening Inventory + Purchases – Closing Inventory
The Closing Inventory valuation uses the Latest Cost for LIFO, the earliest Cost for FIFO, Average, Standard and Individual costs depending on the business policy.
FIFO gives one the maximum profit while LIFO gives one the maximum value to your stock holding.
Here the COGS is calculated for each individual sale based on the method for costing used.
There are a number of different methods for calculating COGS as well as Cost of Inventory Stocks
Discrete or Specific Identification
Normally used by Retailers of high value items such as Jewellery,Watches Electrical items where each individual item can be identified (I.e. a serial number) and the cost of each item is used.
Each time a Purchase is made the Cost of Goods changes on the basis of the cost of the new purchase and the COG of the goods in stock
New item Cost = (Number of items purchased X Cost of item purchased) plus (Number of items in stock X Cost of item in stock) divided by the total number of items (New plus in-stock)
First-In, First-Out (FIFO)
When goods are sold it is assumed that the items were the oldest purchased within the number of items in stock and the corresponding cost is allocated to the COGS.
Here it assumed that the item sold was the last to be purchased of that still available in stock and the corresponding cost is used for COGS.
This is when purchases are in frequent and a cost is applied for given period of time and subsequently adjusted as and when necessary.
It also necessary to note that the Cost of an item is not just the price one paid for it but must include freight, transport, handling and storage charges amongst others.
In all of the above methods for Perpetual Inventory during a physical stock take and discrepancy which could be caused by a number of reasons I.e. shoplifting, incorrect labeling or location, damage etc. the system figures are adjusted for the final valuation.
Read more: iOM Retailigence