Question

Samsung Electronics reports the following regarding its accounting for inventories.

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the average cost method, except for materials-in-transit. Inventories are reduced for the estimated losses arising from excess, obsolescence, and the decline in value. This reduction is determined by estimating market value based on future customer demand. The losses on inventory obsolescence are recorded as a part of cost of sales.

1. What cost flow assumption(s) does Samsung apply in assigning costs to its inventories?

Short answer

Under the average method, it isassumed that each inventory unit can be substituted by another. There is the only difference in their purchase price.

Step-by-step solution

Definition of Purchase Price

The amount paid for acquiring any asset or investment is the purchase price. It is reduced when the discount is allowed by the seller.

Cost Flow Assumptions Applied in Assigning Cost to Inventories

Under average cost, the per-unit cost is calculated using the following formula:

$\mathrm{Average}\mathrm{price}\mathrm{per}\mathrm{unit}=\frac{\mathrm{Total}\mathrm{costs}\mathrm{of}\mathrm{goods}\mathrm{available}\mathrm{for}\mathrm{sale}}{\mathrm{Total}\mathrm{units}\mathrm{available}\mathrm{for}\mathrm{sale}}$

The cost flow assumption made under this method is that goods can be substituted for one another, and the only difference that exists is the purchase price of the goods. Therefore, the total cost is calculated by adding all purchases and dividing it by the number of units.