Question

In: Finance

Per the video summary, there are three (3) primary inventory costing methods used by companies: LIFO,...

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

Solutions

Expert Solution

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:

  • Cost of goods sold has first costs incurred
  • Price manipulation is rare
  • Underestimates or overestimates the cost of goods sold if prices are rising or falling, respectively

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:

  • Easy moving of old products
  • Easy moving of recent expiring products
  • Inventory will have new and fresh stock all the time which the company will like

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:

  • Cost of goods sold has last costs incurred
  • Disallows manipulation by management and uses the most relevant cost for the income statement
  • Underestimates or overestimates cost of goods sold if prices are falling or rising, respectively. Also, cost flow disagrees with ideal, physical flow of goods

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:

  • Focus on prices so always higher priced product will be sold first
  • Multiple vendors with different prices, so inventory can be easily sorted

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:

  • Cost of goods sold has average costs incurred
  • Disallows manipulation by management and better estimation of the cost of goods sold than FIFO or LIFO if prices are rising or falling
  • Tends to ignore extreme costs of inventory and there is no theoretical reasoning for using this method

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.


Related Solutions

Per the video summary, there are three (3) primary inventory costing methods used by companies: LIFO,...
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 (LIFO). Amazon (FIFO), FEDEX (Weighted Average).
Inventory Discussion Compare and contrast the three different inventory costing methods: LIFO, FIFO and weighted average...
Inventory Discussion Compare and contrast the three different inventory costing methods: LIFO, FIFO and weighted average cost. Additionally, give an example of a reason why one company might use one of these methods.
Inventory Discussion Compare and contrast the three different inventory costing methods: LIFO, FIFO and weighted average...
Inventory Discussion Compare and contrast the three different inventory costing methods: LIFO, FIFO and weighted average cost. Additionally, give an example of a reason why one company might use one of these methods.
Explain the difference between the FIFO and LIFO inventory costing methods. In a period of rising...
Explain the difference between the FIFO and LIFO inventory costing methods. In a period of rising prices, which method would result in a higher net income and why? Why might a company choose the method that would result in a lower net profit? Participate in follow-up discussion by discussing which inventory method you would recommend and why.
CA8.11   (LO 3, 4 ) (LIFO Choices) Wilkens Company uses the LIFO method for inventory costing....
CA8.11   (LO 3, 4 ) (LIFO Choices) Wilkens Company uses the LIFO method for inventory costing. In an effort to lower net income, company president Mike Wilkens tells the plant accountant to take the unusual step of recommending to the purchasing department a large purchase of inventory at year-end. The price of the item to be purchased has nearly doubled during the year, and the item represents a major portion of inventory value. Also answer the following:       -what ratios are...
We learned the differences between accounting for inventory under the FIFO, LIFO, and average costing methods....
We learned the differences between accounting for inventory under the FIFO, LIFO, and average costing methods. Additionally, we explored how the income statement impact may differ under each of the three methods. Pick a retail company and research which method the company uses to account for inventory. Note: Please select publicly traded companies, as this will make the information easier to locate.
(Please answer the LIFO and the weighted average cost) Inventory Costing Methods-Periodic Method The Lippert Company...
(Please answer the LIFO and the weighted average cost) Inventory Costing Methods-Periodic Method The Lippert Company uses the periodic inventory system. The following July data are for an item in Lippert's inventory: July 1 Beginning inventory 40 units @ $9 per unit 10 Purchased 60 units @ $10 per unit 15 Sold 70 units @ 26 Purchased 35 units @ $11 per unit Calculate the cost of goods sold for July and ending inventory at July 31 using (a) first-in,...
Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods.
Penn Company uses a periodic inventory system. At the end of the annual accounting period, December 31 of the current year, the accounting records provided the following information for product 1:Required Compute ending inventory and cost of goods sold for the current year under FIFO, LIFO, and average cost inventory costing methods.
which costing methods are used by manufacturing companies and why? (please give reasons too)
which costing methods are used by manufacturing companies and why? (please give reasons too)
Inventory is an important part of many companies Balance Sheet. The costing methodology used to value...
Inventory is an important part of many companies Balance Sheet. The costing methodology used to value inventory in manufacturing organization can impact the organization’s bottom line. Two important method of inventory costing in manufacturing companies are Variable Costing and Absorption Costing. (a) Describe each method - Variable Costing and Absorption Costing (b) Briefly outline their differences.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT