Accountants and Management Accountants Essay Example | Topics and Well Written Essays - 2000 words

Accountants and Management Accountants - Essay Example There is a cost incurred whenever an item is sold. This cost is however, hard to estimate when parts of the inventories were purchased at different prices (Roychowdhury 2004). This calls for adoption of an inventory accounting method so as to assign each item an expense so as to avoid losses. The costing method adopted always does not affect inventory physical flow but affects the value of the inventory. Accounting methods adopted are FIFO, LIFO, and Weighted Average Cost (WAC) among others (Drury 2012). Â  FIFO (First in First Out) is based on the assumption that the inventories that are bought first are sold first and those bought later are sold later (Roychowdhury 2004). FIFO is commonly used by entities that deal in goods with sh lifespan. These goods need to be sold before their expiry dates so as to avoid losses that may result. FIFO method is common in small business entities. As the Roychowdhury (2004) reports, use of FIFO is advantageous because of its usefulness in cases w here small numbers of transactions are involved and where price of materials is falling. Customers are likely to buy more products at low prices and hence exhausting the stock. It also helps in sorting out the difficulties associated with bulky goods with unit prices and consequently avoiding loses while maximizing profits. The business may be able to avoid quality deterioration of the stored goods as the goods are sold in the order of their arrival. This makes perishable goods and other goods with short shelf life to be sold before the expiry date. In addition FIFO facilitates the implication of current market price in the value of the closing stock of materials. This makes FIFO be sensitive to the market changes. It is very useful where the prices are falling. This is because the product demand is likely to rise and hence attracting more customers. With FIFO, materials are utilized in the order of their purchase hence making it to be a logical process. This is the most economical procedure of utilization of materials as the cost of their handling is greatly reduced. On the other hand, FIFO is disadvantageous as it is not useful in the situations that involve many inventories bought during same period but at different prices. This is because their flow rate is not the same hence some may expire still in stock. FIFO method cannot be used to achieve the objective of matching current costs with the current revenues. In the events of inflation, FIFO leads to exaggerated profit. Also if the material’s prices rapidly rise, the production cost may be understated hence causing enormous losses. When consignments are received frequently at varying prices, there is increased possibility of errors if the store ledger clerk does not carefully ascertain the prices to be charged on goods. It can also lead to a confusion in the of charging prices of goods produced at the fluctuating cost of materials as they need different pricing which may interfere with the demand. This is per the Roychowdhury (2004). LIFO (Last-In-First-Out Method) is based on the assumption that the last inventories bought are sold first while those bought first are sold last (Roychowdhury 2004). The materials are valued as per the latest purchase prices. The earliest price of materials is used to value the closing stocks. LIFO is very useful in cases of rising prices as the material is issued at current market price. The application of the LIFO is advantageous as Roychowdhury (2004) points out. It is very beneficial in cases where matching of cost and revenue is required as the goods can be sold at any time but long enough to be appropriately