Why is it unrealistic to assume that inventory costs will remain constant over time? please explain.

Why is it unrealistic to assume that inventory costs will remain constant over time? please explain.

Expert Solution

It is unrealistic to assume that inventory costs will remain constant over time because the market is always considered to be dynamic i.e. prices of the goods always keeps fluctuating.

In this dynamic business environment it would be very unrealistic if we assume that all the goods held as inventory will remain constant over time because as the market changes the prices of the goods keeps on fluctuating.

That is the reason why we use different methods to compute inventory of a business to make sure that the goods held as inventory are valued at current prices and not at constant price. The different methods for valuation of inventory are as following:

• FIFO(First in first out)

•LIFO(Last in first out)

•Simple average method

•Weighted average method

These all methods are made to keep the inventory prices equal to market prices.

Thus the inventory can never be valued at constant rate over time.

In case of any doubt please comment below.

Thank you.........

ekkarill92 answered 2 years ago

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