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Topic to be tested: 

  • LIFO-FIFO Costing methods

 

Learning objectives: 

  • To learn about the practical implementation of costing methods for proper inventory management

 

Discussion Question:

Silver Corporation (SC) - an oil refining company is dealing in oil refining and marketing business for the last two years. The company has centralized decision making system, so all the decisions are made by the top level management at its head office located at Oil City. Due to poor economic conditions in the country, the prices of inputs have risen to an abnormal hike. Due to this inflationary pressure, the companies are facing with the higher cost of production and this has ruined the corporate profits. To tackle this alarming situation, SC has appointed a certified cost analyst to figure out the main cost issue.

 

After detailed observation, the analyst concluded that the company needs to improve its inventory costing system. He argued that, if the company successfully manages the inventory then the cost will be reduced remarkably.

                                                 

On the basis of the analyst’s recommendations, the management assigned a task of improving its inventory costing system to Mr. White – Operations Manager, and Mr. Blue – Store Manager. They designed an initial inspection plan to analyze the inventory movements during different frame of periods. Their intention was to search and recommend at least the most efficient inventory costing system. After completing the analysis, both the managers came up two different recommendations – Mr. White recommended the use of FIFO costing method as this will lower the company’s taxable income.  Whereas, Mr. Blue came up with the suggestion to adopt LIFO costing method as this may help the company in acquiring loan from any bank.

 

The management feels it difficult to decide which one of these two to adopt, as both are conducive.

 

Requirement:

As a student of cost accounting you are asked to help the SC management that either the recommendations given by both managers (Mr. White & Mr. Blue) are appropriates for inflationary period (Ignore IAS – 2 on Inventory) or not? Support your answer with logical reasoning.

 

Important Instructions:

 

1. Your discussion must be based on logical facts.

2. The GDB will remain open for 2 working days/ 48 hours.

3. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

4. Obnoxious or ignoble answer should be strictly avoided.

5. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

For Detailed Instructions please see the GDB Announcement

 

Views: 3603

Replies to This Discussion

i think you are right. 

yes it is correct. By using FIFO method the Cost of goods sold figure will be low and value of closing stock will be recorded at high value in increasing price scenario of the materials. So the income is high, the tax will be more. By using LIFO cost will be recorded high and income will be less with less tax and cash flow of the company is better.

 Dear you are right as far as FIFO is concerned, but we have to answer if Mr White and Mr Blue is right or wrong. In my opinion both are wrong. In context of FIFO you have already mentioned the correct answer and in case of LIFO answer , our aim/ mandate is not to get loan from bank but to suggest appropriate answer for the company. By getting loan we are increasing the problem of company and especially in context of inflation. The old inventory will get  more effect of inflation. So my conclusion is that both have given wrong answers to company. Thanks       

company should use LIFO costing method because materials consumed are priced in a systematic and realistic manner. It is argued that current acquisition costs are incurred for the purpose of meeting current production and sales requirements therefore the most recent costs should be charged against current production and sales. Unrealized inventor gains and losses are minimized and reported operating profits are stabilized in industries subject to sharp materials price fluctuations.

Inflationary prices of recent purchases are charged to operations n periods of rising prices thus reducing profits, resulting in a tax saving, and therewith providing a cash advantage through deferral of income tax payments. The tax deferral creates additional working capital as long as the company continues to experience an annual inflation rate increase.

haseeb gud keep it up & thanks 

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i agreed with you Masood bhai... both have given wrong answers..... the best method is weighted average method...

Plz send complete solution

ap ko idea de to diya hai k dono managers ne galat solution diya hai... FIFO & LIFO both can not be used... q nahi use ho sakte wo ab handout mein advantages & dis advantages parh lo FIFO & LIFO k...& describe them in ur own words... :) 

I think you are right, cannot agree with either manager.

Since with FIFO taxes are bound to increase, also the stocks will always remain mismanaged. 

And with LIFO taking a loan will put the company in debt. Inflation increases interest rates, hence a vulnerable time to be taking a loan. Apart from that, with LIFO new income is lowered, the company might not be able to re-pay the loan at all.

With the weighted average the company is safe, its not leaning towards either end, the prices will fall in the middle ensuring a steady flow of income on each product.

nadia ji lakin question main batana hai ke kaun sa method lagana chahiyee FIFO ya LIFO so in donon main se aik pe vote to karna hoo ga FIFO se profits baharte hain aur cost of goods sold bhi kam rahti hai inflation period main

ur right man

 more income = more taxes

Agree!

BUT, our aim is to reduce the cost of production, which can be attained using FIFO method.

so my vote is for FIFO.

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