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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: 3613

Replies to This Discussion

I AM ALSO AGREE WITH MR BLUE COMMENTS....AND LOGIC IS RIGHT ACCORDING TO HIM

Guys, read the requirements again... they didn't ask that which one is right....they asked that either both r right or both r wrong?? unho ne ye nahi kaha k dono mein se kon sae hai...unho ne poocha hai k dono sae hain ya dono galat.... so here is the best part...k answer un k question mein e chupa hai & that is k both r wrong... now u just have to give reasons that y FIFO & LIFO cant b adopted.... thank u

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.

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.

Mr. blue is right because under LIFO method cost of goods sold will be highest thus lower tax margins which will increase the cash in flow. and then the company can borrow more money of basis of more cash inflow.
and MR. white is saying FIFO will lower the taxable income, but FIFO increases the taxable income as it increases the net income, so more income = more taxes

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

 today is last day. .... plz, upload solution....

Guys, read the requirements again... they didn't ask that which one is right....they asked that either both r right or both r wrong?? unho ne ye nahi kaha k dono mein se kon sae hai...unho ne poocha hai k dono sae hain ya dono galat.... so here is the best part...k answer un k question mein e chupa hai & that is k both r wrong... now u just have to give reasons that y FIFO & LIFO cant b adopted.... thank u

 Dear Tariq sb if company use lifo method in costing the old stock of inventory raw material or finished goods cold be expired or damage. which makes the reason loss.

what will the benefit to company in such case.

Jitna tax bachay ga LIFO se utna loss ho jay ga material expire hone se .

YA PHER COMPANY PHYSICALLY OLD STOCK CONSUME KRAY OR BOOKS ME LIFE METHOD USE KRAY 

hehehehe ................ na Fifo waly Votes theek na Lifo................. subney discuss to kia lakin kisi nay ya nai btya k hamein in may say choose kerna hai ya phir Weight average krna hai..

What about this????????????

FIFO gives the lowest cost of materials issued and the highest cost of ending inventory, consequently the highest gross profit. On the other hand LIFO gives the highest cost of issues and lowest cost ending inventory, consequently the lowest gross profit. Whereas, the cost and as a result the gross profit, calculated under average cost method are in between FIFO and LIFO. The illustration demonstrates a period of rising prices. In a period of falling prices, naturally, the results would have been reverse.

i think both recmond suggestion is wrong 

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