Question

the customer bought Wine, Do you think the store used FIFO, LIFO, or weighted average for ? Why? and explain how it could have been accounted for using a different method

Another customer bought milk from a store.Do you think the store used FIFO, LIFO, or weighted average for ? Why? and explain how it could have been accounted for using a different method.

Another customer bought beef from a store. Do you think the store used FIFO, LIFO, or weighted average for ? Why? and explain how it could have been accounted for using a different method

Answer 1

Answer : In order to understand the subject let us first understand the meaning of FIFO, LIFO and Weighted Average which are as follows:

a) FIFO (First in First Out) - Under this method materials are used in the order in which they are received in Stores. In other words, materials received first will be issued first.

This method is most suitable in times of falling prices.

b) LIFO (Last in First Out) - This method is opposite to FIFO method in that materials received last are issued first.

This method is most suitable in times of rising prices.

c) Weighted Average - This method gives due weight to quantities. Here the average price is calculated by dividing the total cost of materials in the stock from which the material to be priced could be drawn, by the total quantity of material in that stock. In other words-

Weighted Average Price = Value of materials in stock/Quantities in stock

The issue prices are calculated each time materials are in Stores and not when they are issued.

i) The customer bought Wine - The price of wine has a linkage with time which increases with time. Hence, as explained at para b) above, the store will use LIFO method and not other method as explained at para a) and para c) above. However, if store uses the other two methods it will be accounted in the following manner.

- FIFO - Wine received first will be issued first. Hence, in this case stock of inventory will be higher.

- Weighted Average - Wine will be sold at an average price irrespective of actually paid. Hence, it may not yield the desired result.

ii) Another customer bought milk from a store - The milk is a perishable item. Hence, as explained at para a) above, the store will use FIFO method and not other method as explained at para b) and para c) above. However, if store uses the other two methods it will be accounted in the following manner.

- LIFO - The milk received last will be issued first. Hence, in this case stock of inventory will be lower. However, there will be every possibility that many of the stock may expire which will become a loss to the store.

- Weighted Average - The milk will be sold at an average price irrespective of actually paid. Hence, it may not yield the desired result.

iii) Another customer bought beef from a store - The beef is a perishable item. Hence, as explained at para a) above, the store will use FIFO method and not other method as explained at para b) and para c) above. However, if store uses the other two methods it will be accounted in the following manner.

- LIFO - The beef received last will be issued first. Hence, in this case stock of inventory will be lower. However, there will be every possibility that many of the stock may expire which will become a loss to the store.

- Weighted Average - The beef will be sold at an average price irrespective of actually paid. Hence, it may not yield the desired result.