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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

g ggg................... 

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

As a student of cost accounting I recommended the Mr. Blue suggestion to adopt LIFO costing method because this may lead to overstatement of stock and profit and in case of rising prices this method leads to understatement of stock and profits and according to the case when rising prices increase cost of goods sold, profit and, therefore, tax liability are reduced. LIFO has expensed in Cost of goods sold as compared to FIFO and LIFO Liquidation profit can occur when units purchased are less than units sold in the period. Using LIFO therefore, should begin to consider the impact of an inventory valuation method change on their future tax liabilities and financial reporting, and begin communicating this information to their stakeholders for discussion.


 Produce lower income during an inflation period; result in tax savings.
 This value of the beginning inventory needs to be adjusted to the cost.
 The effect of the change on the current year’s income and on the value of the ending inventory must be disclosed

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