Inventory Costing and Valuing Methods
Unit 4 Discussion: Inventory Costing and Valuing Methods
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The following activity supports ELOs 1.3, 6.1 and 6.2.
Why is it necessary for companies to manage their inventory?
Businesses that can manage and account for their inventory have accurate data to make informed decisions. For example, inventory management lets you know when it’s time to replenish stock, how much product is on-hand for sales, whether theft has occurred, etc. Additionally, you must accurately report inventory so that financial statements reflect the most current and accurate numbers. These tasks are critical for a business to be successful.
Companies can use either a periodic or perpetual inventory system. You will find that most companies use a perpetual system because it updates inventory in real time. Think about a retail store. As the product moves through the company or warehouse, it is being tracked by the accounting system under a perpetual inventory. When the item is purchased at the point of sale, the system will update the inventory. Small business owners that typically deal with small amounts of inventory use a periodic system. Most seasonal businesses also use a periodic system.
There are four different inventory costing methods used to help businesses value inventory and assign the cost of goods available for sale.
- First-in, First-out (FIFO) (most commonly used)
- Last-in, First-out (LIFO)
- Weighted Average Cost
- Specific Identification Cost
Choose one of the following types of inventory before responding to the discussion questions below.
- Food (perishable food items such as dairy or produce)
- Medical supplies
- Mobile phones or electronic devices
- Wine (super premium aged wine or supermarket brand wines)
- Petroleum oil or coal
- Bridal dresses
Please respond to the following prompts in your initial post:
- Identify one of the (inventory) items from the list above.
- Do you think businesses that deal with these items use a Perpetual or Periodic Inventory System? Explain your answer.
- Suggest one of the four types of cost flow assumptions for this type of inventory. Explain why you think this is the best match for the inventory items you have chosen.
- What accounts are affected? Identify at least two accounts and explain your answer.
- Imagine you are a business owner and you want to sell this type of inventory overseas. Would you use the same cost flow assumption? Why or why not?