Definition of Determining the Cost of Missing Inventory
The approximate cost of missing inventory is the difference between 1) the cost of the inventory items that are physically present or accounted for, and 2) the cost of the inventory that should be on hand based on the accounting information.
Examples of Determining the Cost of Missing Inventory
If a company's accounting records or its inventory system uses the perpetual inventory system (and it is maintained properly), determining the cost of the missing inventory is easy. You simply subtract the cost of the items that are in inventory from the costs shown in the perpetual inventory system.
If the perpetual inventory method is not used (or it is not maintained properly) you can determine the cost of the missing inventory with the following steps:
- Determine the cost of the inventory at the time of the previous physical inventory. Let's assume this occurred on the prior December 31.
- Determine the cost of all the goods that were purchased since December 31.
- Combine Step 1 and Step 2 to arrive at the cost of goods available.
- Determine the cost of goods sold percentage. This is 100% minus the company's normal gross profit percentage. (This should be available from the previous year's income statements.
- Multiply the cost of goods sold percentage times the sales since December 31. The result is the approximate cost of goods sold.
- Subtract the approximate cost of goods sold (Step 5) from the cost of the goods available (Step 3). This is the approximate cost that should be in inventory.
- Determine the cost of the goods that are actually in inventory.
- Subtract the cost of the goods that are actually in inventory (Step 7) from the cost of goods that should be in inventory (Step 6). The shortage is the cost of the missing inventory.