Question

Why do relatively stable purchase prices reduce the significance of the choice of an inventory costing method?

Answer 1

When prices are stable then irrespective of any valuation of costing method we use, inventory prices will be same. To prove this, lets compare FIFO vs LIFO valuation method of costing.

Suppose we have following data:-

Date	Units Purchased (sold)	Price per unit
01.01.18	800	20
01.10.18	-400
30.11.18	400	20

In case we use FIFO, valuation of inventory will be:-

400*20+400*20= 1600

If we use LIFO, valuation of inventory will be:-

400*20+400*20= 1600

So valuation of inventory will be same in both method. This is because, in case price is constant then value will also be same.

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