Nieman Marcus tried a new trick this season – selling a Mystery Box. It was a hit, with customers quickly snatching up $250 boxes filled with surprise items. A different kind of promotion, it was still pretty straight-forward, as each customer received the same thing, and they could count on Nieman Marcus to provide them with a quality collection worth well more than the sticker value of the box. On the accounting side, it seems pretty easy to deal with; recognize Revenue for 250/box, COGS at their true value, and then Retained Earnings need to be debited for the value of the difference.

However, this campaign seems to be a simple imitation of the Luck Promotions common in Japan and other Asian countries. In deals such as this one, customers purchase an item, having no idea of its value. Sometimes, the contents may be priced accurately, some times the contents are worth less than the ticket value, and other times they can be worth quite a lot more than their ticket value. In this case, how should a company account for their COGS?

On the one hand, Specific Identification would seem to be preferred, as each of these bags can have a radically different value. However, assuming this is impossible, what then? Pricing the COGS using a weighted average calculation seems the most appropriate. Not only is it an accessible method of inventory calculation, it seems to accurately reflect the value of the contents. After all, when a customer buys a “cheap” bag, they are not actually buying the contents of the bag, rather they are buying a possibility of receiving an expensive bag. Essentially, what they are buying is the expected value of the bag – or in other words, the Average cost of the contents.

This type of accounting may make sense locally, but it will need to be reconciled with the actual inventory count, and the inventory methods of the company. Therefore, an adjusting entry for a marketing cost will probably need to be made at the end of the promotion.