Which Inventory Method Would Be Used to Cost Milk & Other Dairy Products?
When you buy and sell perishables, you have a brief window of time to move your goods out of inventory and into your retail store. Milk and other dairy products, including butter, cheese and yogurt, have a limited shelf life. A small business cannot afford to lose money from spoilage because of inventory mismanagement. Your inventory method must account for the expiration date from the moment your dairy products arrive at your loading dock until you place it on your shelves for sale.
With perishable products, the sell-by date controls how your inventory process works. The sell-by date printed on every dairy product carton or label acts as your sale cut-off date. Customers will bypass a milk carton at or near the expiration date in favor of a carton with a later expiration date. Every gallon of milk your customers reject because of this represents lost revenue. Your inventory method must keep the newest inventory in reserve and put the older inventory on the shelves first.
The first-in, first-out inventory method rotates inventory based on when you receive it. Older products are placed on the shelves first, with the newer inventory held in reserve. As the older inventory is used up, the next-oldest items hit the shelves. The cost of each inventory shipment is recorded separately from your other shipments. Since you are using your lower-cost inventory first, your cost of goods sold is lower and your profits higher.
Your dairy products sell-by date controls your inventory rotation. For example, say you receive a milk shipment on day three, day six and day nine. As day three milk is sold, you restock your shelves with day six milk. Day three milk is pushed to the front of the shelves with day six milk behind it. If day three milk remains unsold after the sell by date, you remove it from your shelves and push day six milk to the front of the shelf. As day six milk is sold, day nine milk is placed behind day six milk.
Write off the value of your dairy products that are lost due to spoilage and waste. To write off the value, you credit your "Inventory" account and debit your "Loss on Write-off of Inventory" account. This removes the inventory from your accounting records so your inventory account is not overstated. The "Loss on Write-off of Inventory" is included on your income statement. This reduces your profit by the amount of the inventory you wrote off and may have the added benefit of lowering your taxable income.