Question

On your own words, talk briefly about two of the inventory costing methods, give one example of each method.

Answer 1

There is various inventory costing method such as:

1. First In First Out Method (FIFO)

2. Last In First Out Method (LIFO)

3. Average Cost Method

4. Specific Identification Method

As per the requirement of the question, two methods need to be explained these are:

1. FIFO: FIFO method work on the assumption that the inventory first purchased are sold first. The major benefit of this method it reduces the risk of inventory obsolescence. Under this method, since the inventory first purchased are sold first thus the closing inventory remaining in the stock are of latest cost. FIFO method is allowed under IFRS.

Example: Purchase 150 Unit for $ 20, Sold 120 Unit, Purchase 120 Unit @ $24

Thus closing Inventory will be valued ar (30*20)+(120*24)= $3480

2. LIFO: LIFO method work on the assumption that the inventory last purchased are sold first. Imagine a scenario where a departmental store is organizing inventory and customers are picking from front and again departmental store is organizing inventory this is how LIFO works. SInce last inventory is sold first thus the cost of goods sold is higher and becuase of which the taxes can be reduced.

Example: Purchase 150 Unit for $ 20, Sold 110 Unit, Purchase 120 Unit @ $24

Thus closing Inventory will be valued ar (150*20)+(10*24)= $3240

Hope this will do for you. In case of any doubt give a comment and in case if you are satisfied give a thumps up.