COST ACCOUNTING

The Effects of Selecting Inventory Management Valuation

The Effects of Selecting Inventory Management Valuation

Introduction

The fundamental basis of major valuation methods is the cost accounting flow of inventories, not their physical flow. However, this means that when an item is charged for production or taken to inventory it need not necessarily be recorded at a cost at which it was purchased, rather at a cost determined by a specific mode of cost accounting. This has the advantage of standardizing the costing system where the difference between the cost flow and physical flow is minimized. The three popular valuation methods are first in first out (FIFO), last in first out (LIFO), or the weighted average method.

Discussion

In the market economy environment, the prices of various commodities are always fluctuating. If the price rose too fast under the premise, because of inflation, the first purchase of inventory the cost is relatively low, then the purchase of inventory cost high. The value of such inventories is below market value, the low cost of goods sold and ending inventory costs are high. However, the price of goods at recent market prices, and thus more revenue, sales revenue and cost of sales does not meet the matching principle, this calculation of the profit is high, the formation of inflated profits in real terms as inventory profits (Needles, B., Powers, M. and Crosson, p.352) Inflated profits, will add to the burden of corporate income tax , as well as to investors' dividend increase, resulting in the increase in corporate cash outflows. However, from a funding point of view, more profits , higher stock value, higher current ratio means that the corporate financial position is good, to win the trust of the public enterprises, enhance investor confidence in investing, and profits size is often an important benchmark for the evaluation of a business person in charge of performance. Many companies evaluate the profit level of performance of corporate management personnel and reward managers based on evaluation results. At this point, managers are often willing to adopt the first-in, first-out, because to do so would overestimate the level of profits tenure, which is more immediate Drury, p.152).

LIFO method is the opposite method of FIFO. It is based in the reverse order of their admission to the enterprise. This means that stocks that are released into production, is estimated to cost the most recent receipt of inventory, i.e., the principle of "last in, first out."

So if we are shipping the items at the end of the month, it would use the items that were purchased recently. Although there is no real deflation in the world in this way it could be beneficial when there is a very low interest rate and product price is increasing rapidly. As indicated before that there are certain companies that must use certain methods for valuation. Not many companies use this method, because most of the time it actually increases the cost to the goods.

It is also considered to be more accurate in ...