Question

There’s no reason for me to get excited about the choice between the weighted-average and FIFO methods in my process-costing system. I have long-term contracts with my materials suppliers at fixed prices.” Do you agree with this statement made by a plant controller? Expl

Answer 1

The method of inventory valuation can affect the important financial figures of a company especially revenues and profits. In a time of rising inflation, the profits for a company will be shown increased under FIFO method as compared to weighted average method, because the goods will be sold on higher prices but the cost of goods deducted will likely be the earliest and cheapest. In a time of decreasing inflation, the profit margins for a company will be higher under weighted average method as compared to FIFO method because the cost of goods sold will be an average figure under weighted average method which will be lower if costs are recorded under FIFO method.

however if the company as stated in question have fixed price long term contract with supplier , both these method wil have very insignificant effect on the financial postion of the company. hence the statement made by plant controller is correct and i agree with the statement