Question

FIFO and LIFO. Analyze the following scenario:

The Hospital for Ordinary Surgery uses pharmaceuticals for its patients. It started the year on January 1, with an inventory of 1,000 doses of an antibiotic drug that cost $17 per dose. On January 2, it purchased another 300 does for $21 each. From January 3 through June 30 it used 800 doses. On July 1, it bought 500 more doses at $23 each. From July 2 through the end of the year it used 400 doses. What is the inventory value at the end of the year, assuming FIFO? What is the value assuming LIFO? Clearly label the calculations of the inventory amounts using Excel. Use formulas to calculate the FIFO and LIFO inventories and format the cells to insert a comma if there is more than three numbers and round to the nearest whole number.

Explain the advantages and disadvantages of FIFO and LIFO inventory methods and evaluate the best inventory method is best for this scenario.

Answer 1

Under FIFO Method, inventory purchased first is utilised first.

Units in Closing Stock = 1000+300-800+500-400 = 600 doses

Value will be equal to the latest inventory purchased

= 500*23 + 100*21

= $13,600

LIFO: Under LIFO method, latest inventory purchased is utilised first

Value = 500*17+100*23 (since 800 were issued before buying 500 doses on July 1, only units could be taken from initial stock)

=$10,800

Advantages of FIFO:

It follows chronological order and hence, values closing stock as per latest market price

Disadvantage:

It does not charge input cost on the orders as per the latest market price. Historical cost is used

LIFO:

Advantages:

It takes into account latest market cost of input materials for charging cost for an order

Disadvantages:

Closing Stock does not represent true market price

*Since the market price of dose has an increasing trend, FIFO Method is more suitable for this scenario