04-17-2009, 01:27 AM
Yes im going to apply this to a trading business. In my opinion (correct me if Im wrong), we have the following rules for stock card under perpetual inventory
* Purchases
Inventory quantity and total purchase price is added the balance-in-hand. The weighted average cost (WAC) updates itself by dividing the total price by quantity in hand. This changes the WAC.
* Sales
The quantity sold is reduced from the balance-in-hand at the prevailing WAC rate in the stock card. As a result, WAC doesn't change in case of Sales.
* Sales Returns
The quantity is added back to the balance-in-hand at the rate at which they were sold (by rate I mean the cost, not sales price). This 'can' change the WAC. If there were no purchases made during the period of Sales and Sales Returns, then the WAC must be the same as before, therefore WAC will not change when Sales Returns are recorded. But if more purchases were made at different rates, then WAC will change as the Sales Returns (which is to be recorded at the rate at which they were sold; which might differ from current prevailing WAC rate) will modify the WAC.
* Purchase Returns
The quantity of Purchase Returns is to be reduced from balance-in-hand at the rate at which they were purchased. Therefore it is most likely that it will change the WAC also.
* Stock Lost
The stock destroyed is recorded by reducing the quantity in hand at the current prevailing WAC. Therefore it will not amend WAC.
I have gathered the above rules from referring various websites and books. Now please advise if they are true.
* Purchases
Inventory quantity and total purchase price is added the balance-in-hand. The weighted average cost (WAC) updates itself by dividing the total price by quantity in hand. This changes the WAC.
* Sales
The quantity sold is reduced from the balance-in-hand at the prevailing WAC rate in the stock card. As a result, WAC doesn't change in case of Sales.
* Sales Returns
The quantity is added back to the balance-in-hand at the rate at which they were sold (by rate I mean the cost, not sales price). This 'can' change the WAC. If there were no purchases made during the period of Sales and Sales Returns, then the WAC must be the same as before, therefore WAC will not change when Sales Returns are recorded. But if more purchases were made at different rates, then WAC will change as the Sales Returns (which is to be recorded at the rate at which they were sold; which might differ from current prevailing WAC rate) will modify the WAC.
* Purchase Returns
The quantity of Purchase Returns is to be reduced from balance-in-hand at the rate at which they were purchased. Therefore it is most likely that it will change the WAC also.
* Stock Lost
The stock destroyed is recorded by reducing the quantity in hand at the current prevailing WAC. Therefore it will not amend WAC.
I have gathered the above rules from referring various websites and books. Now please advise if they are true.
