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You are recently hired as a staff accountant for a small finished goods manufacturing company. Part...

You are recently hired as a staff accountant for a small finished goods manufacturing company. Part of your duties include doing the month end inventory of finished goods. After a few months you do not look forward to this as the amount of inventory seems to be increasing. In order to satisfy your thoughts on this increase of inventory you decide to review the financial information for the last few months.

Looking over the Income Statement you see the profits have been steady, but the gross profit percentage has increased, and the cost of goods sold have decreased. This does not seem possible as the company has increased the amount of inventories.

Identify why this situation could exist, providing an explanation which can be given to the CFO.

In order to assist in controlling the costs and providing a lower inventory carrying cost, select a costing system and explain why it should be utilized.

Solutions

Expert Solution

This situation as incurred probably because the carriying cost of inventory has been significantly reduced

There are some ways to reduce the carriying cost , they are

Improving the layout of storeroom and warehouse

and

Signing long term agreement with suppliers

These explanations can be provided to the CEO

One of the best costing system to reduce the carriying Cost is by adopting perpetual inventory

It is a method of inventory management that records real-time transactions of received or sold stock through the use of technology – generally considered a more efficient method than a periodic inventory system.

Moreover, a perpetual inventory system allows managers to track information against physical inventory for discrepancies. Although occasional physical inventory checks are still good practice – particularly to check for theft, spoilage, and possible human errors, there is no need to do daily checks, saving staffing costs. It’s also a system that saves time as staff no longer have to conduct tedious inventory counts every day to determine the amount of stock available

ekkarill92 answered 1 year ago
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