One accounting decision that food trucks that maintain a food inventory is which inventory accounting system to use to record the cost of goods sold expense, which is the sum of the costs of the products sold to customers during the period. You deduct the cost of goods sold from sales revenue to determine your gross margin. Cost of goods sold is a very important figure. This is because if your food truck gross margin is wrong, your food truck’s bottom-line profit will be wrong.
Product costs are entered in the inventory asset account in the order in which they’re acquired, but they aren’t necessarily taken out of the inventory asset account in the same order. You can choose the right inventory accounting system (for you) to record your cost of goods sold and the cost balance that remains in your inventory asset account.
3 Simple Choices For Your Inventory Accounting System
FIFO (first-in, first-out)
You charge out product costs to cost of goods sold expense in the chronological order in which you acquired the products. The procedure is that simple. It’s like the first people in line at your truck get their orders first. The window server takes the orders in order in which they were bought.
LIFO (last-in, first-out)
The main feature of the LIFO method is that it selects the last item you purchased first. Then it works backward until you have the total cost for the total number of units sold during the period.
Compared with the FIFO and LIFO methods, the average cost method seems to offer the best of both worlds. The costs of many things in the mobile food industry fluctuate, so you may decide to focus on the average product cost over a time period.
Also, the averaging of product costs over a period of time has a desirable smoothing effect. This prevents cost of goods sold from being overly dependent on wild swings of one or two purchases.
The Bottom Line
We understand that not all food trucks maintain an inventory. For those that do, this article should help you select an inventory accounting system you feel comfortable with to keep track of the costs of your inventory.