Question

"Inventory Costing Methods"  Please respond to the following:

DQ #1 Assume that you have been hired as the production manager of a manufacturing company and must determine the best inventory costing system to implement. Discuss two factors that must be considered before making the determination.

DQ #2 As a production manager, one of your key tasks is to improve efficiencies by either increasing productivity or reducing cost. Determine whether the responsibility reports needed to track performance should be created by department, function, or manager, using a costing method of your choice. Based on the costing method you selected, determine the type of data needed to track and evaluate performance to control costs such as cost per unit, cost per hour, etc.

DQ #3  I have not been assigned to teach cost accounting recently. I read a paper about the costs of electronic media devices increasing. This article used the terms "product" costs and "inventory" costs. Do these terms refer to the same costs?

DQ #4 U.S. GAAP is gradually moving towards compatibility with IFRS. Are each of the four inventory costing methods permitted under IFRS? If not, why not?

DQ #5 Many grocery stores tag cut up deli fruit with a date that represents the last day the fruit can be sold. Any fruit not sold at the end of the last day is frequently discarded. Why is it that many grocery stores do not allow their employees to take the fruit home rather than discarding it?

DQ #6 Chapter 3 indicates that ABC is the superior system when assigning overhead costs and improving managerial decision making. I do not know why our text even discusses FIFO, LIFO, specific identification and weighted average. Does it really matter which costing method

Answer 1

DQ #1 Assume that you have been hired as the production manager of a manufacturing company and must determine the best inventory costing system to implement. Discuss two factors that must be considered before making the determination.-

Most important factor to consider –

Financial factor – this factor includes the cost of borrowing money to stock enough inventory can greatly influence inventory management

Other financial factors include the expenses associated with warehouse operations and transportation cost.

Suppliers – They can have a huge influence on Inventory control. Company need reliable supplier in order to plan spending and arrange production .

Lead time – Also important factor in case of Inventory lead time depend on the product type

DQ #2 As a production manager, one of your key tasks is to improve efficiencies by either increasing productivity or reducing cost. Determine whether the responsibility reports needed to track performance should be created by department, function, or manager, using a costing method of your choice. Based on the costing method you selected, determine the type of data needed to track and evaluate performance to control costs such as cost per unit, cost per hour, etc.

• Product costing methods are used to assign cost to manufactured product. The main costing methods available are process costing , job costing and direct costing .
• Job costing – assignment of costs to a specific manufacturing job . This method is used when individual products or batches of product are unique in nature and especially when jobs are being billed directly customers.

Process costing – this is accumulation of labour , material and overhead cost across department . With the total production cost then being allocated to individual units .

• DQ #3  I have not been assigned to teach cost accounting recently. I read a paper about the costs of electronic media devices increasing. This article used the terms "product" costs and "inventory" costs. Do these terms refer to the same costs?
• Product cost include the cost incurred to create a product . these costs included direct labour, direct material, consumables production supplies and factory overhead . product cost can be also considered the cost of the labour required to deliver service to a customer
• Where as Inventory cost include

The cost of holding goods in stock. Expressed usually as a % of the Inventory value , it includes capital , warehousing , depreciation , insurance , taxation , obsolescence and shrinkage cost

DQ #4 U.S. GAAP is gradually moving towards compatibility with IFRS. Are each of the four inventory costing methods permitted under IFRS? If not, why not?

As per USGAAP, Company followed to decide between FIFO, LIFO , Weighted Average cost , Special Identification .

Out of 4 category , LIFO ( last in first out) is not allowed under IFRS

Reason for not accepting LIFO under IFRS – during periods of rising prices ( inflation ) , ending Inventory , is assumed to consist of earlier purchase at lower prices , which may undervalued ending Inventory , due to this reason , LIFO method ot accepted by IFRS . IFRS focus shifted away from the Income statement to the Balance sheet and therefore away from LIFO

DQ #5 Many grocery stores tag cut up deli fruit with a date that represents the last day the fruit can be sold. Any fruit not sold at the end of the last day is frequently discarded. Why is it that many grocery stores do not allow their employees to take the fruit home rather than discarding it?

As per process costing system , company maintain “Normal Loss” and Abnormal Loss concept

Normal loss means that loss which is inherent in the processing operation . it can be expected and anticipated in advance           

Company has to maintain account of Normal Loss – Need to pass following entry and maintain control the same –

Normal Loss A/C – Dr

To Process A/c – CR

Cost ledger control A/c – Dr

Normal loss A/c – Cr

Due to above reason they can not distribute to employee

DQ #6 Chapter 3 indicates that ABC is the superior system when assigning overhead costs and improving managerial decision making. I do not know why our text even discusses FIFO, LIFO, specific identification and weighted average. Does it really matter which costing method

4 category of Inventory is most important to determine cost of inventory ( Inventory valuation ) directly impacts in the financial statement