Question

There are several methods available to calculate the value of a company’s inventory (FIFO, LIFO, Average Cost, Specific Identification, Lower of Cost or Market). Pick one method and provide a company that uses that method and a valid reason why you think the company has chosen that method.

Answer 1

There are several methods available to value the company's inventory but a company has to carefully evaluate the method that is to be used to value the stock and that is beneficial for the company also.

FIFO - First In First Out

This method is used to value the inventory based on the concept that the stock which comes in first goes in production at first and the stock which is purchased at last is the balance. The cost of inventory is the cost of the stock most recently purchased.

DELL COMPUTER uses FIFO

FIFO does not require as much record keeping as LIFO and Dell has business in various nations and some nations restrict the use of LIFO. In order to keep it unique for all nations Dell is using FIFO. The technology also may become obsolete with newer inventions and hence in order to avoid risk of older stocks becoming waste, FIFO should be used. With LIFO older stock remain in inventory for longer period of time and hence higher handling charges are there. With FIFO, stocks can be adjusted for newer prices of inventory but with older stocks in inventory, it would be difficult to adjust the prices of goods.