What are the differences between FIFO, LIFO, average cost, and specific identification? How do you know...

What are the differences between FIFO, LIFO, average cost, and specific identification? How do you know which to choose? Can you mix and match or change whenever you want?

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Expert Solution

Whenever stock is received by store department, it is recorded in stores ledger as receipt, and whenever stock is issued to production department, it is also recorded in stores ledger as issue.

Now various methods are used to calculate the value of closing inventory such as FIFO, LIFO, WEIGHTED AVERAGE & SPECIFIC IDENTIFICATION.

FIFO: First In First Out

Under this method, we assume that Stock which is introduced first in stores ledger shall be issued first for production. This method is preferred because of underlying assumption that stock purchased first shall be used first for production.

LIFO: Last In First Out

Under this method, we assume that Stock which is introduced at last (ie latest stock) in stores ledger shall be issued first for production. It is also preferred by some organisation as it believes that stock purchased earlier is obsolete and hence latest stock shall be used first in production process

Weighted Average:

Under this method, we calculate the weighted average rate of stock lying in our stock and such rate is used to issue stock. The underlying assumption is all stock purchased is common and inidentifiable hence weighted average is used for all the balance stock in ledger.

Specific Identification:

There are various inventories which are used specifically for product and such inventory when issued is directly charged to such production as acquired by them.

Example -

ekkarill92 answered 8 months ago

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