In: Finance
Per the video summary, there are three (3) primary inventory costing methods used by companies: LIFO, FIFO, and Weighted Average. With each method comes a number of pros and cons that a company must consider when implementing its inventory management strategy. Select a company below and discuss the advantages associated with its chosen inventory costing method.
Target - Uses LIFO |
Amazon - Uses FIFO |
FedEx - Uses Weighted Average |
First we need to see each of the method:
FIFO (first-in, first-out) – The FIFO method assumes that the costs of the first goods purchased are those charged to cost of goods sold at the time of selling. Simply, the first goods purchased are the first goods sold. Such items as fresh dairy products, fruits, and vegetables should be sold on a FIFO basis.
Characteristics:
Target: Its a departmental store chain company. So for this not only price fluctutions, the manufacturing date/expiry date of the products are also important. through FIFO method they can easily sell the products which came early in their system.
Advantages:
LIFO (last-in, first-out) - The LIFO method assumes that the costs of the most recent purchases are the first costs charged to cost of goods sold when the company actually sells the goods. In simple terms, the recently purchased will be sold first.
Characteristics:
Amazon: Its an ecommerce company. It doesn't have to bother about the fresh stocks as it has tie-up with different vendors. So, here the price is more important.
Advantages:
Weighted-average – In this method of ending inventory costing using a weighted-average unit cost. Preferably done for similar kind of products. Since the units are alike, firms can assign the same unit cost to them.
Characteristics:
Fedex: A courier company. The products are courier/parcels, which are sorted on different criteria such as weight, place etc. So, assigning a weight is beneficial here. Hence, weighted average method is suitable for it.