Question

Differentiate the treatment of spoilage using the First-in First-Out versus the weighted average costing method.

Answer 1

Under the fifo method of inventory management, spoilage units are charged at the rate from the beginning inventory or earliest purchase units available after sale. Under the weighted average costing method, spoilage units are charged at a rate calculated on the basis of the weighted average cost of the available units. The difference is explained as per the below example:

1/1/2020 Beginning inventory 200@5 $1000

1/5/2020 Purchases 100@4 $400

1/25/2020 Spoilage 5 units

Cost of spoilage under fifo method = Spoilage units X Rate of beginning inventory = 5X5= $25

Cost of spoilage Under weighted average method:

Spoilage rate = Total cost available/ Total units available

                       = (1000+400)/(200+100) =

                       = 4.67

Cost of spoilage = Spoilage units X Spoilage rate = 5 X4.67 = $23.35

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