Question

There seems to be a number of ways to cost inventory, LIFO, FIFO, Wt. Avg., etc. Since comparability is important, why don’t the rules limit you to one method? Also even though you can use any of these, there is also a Lower of Cost or Net Realizable Value rule that has to be followed as well. Can you explain why the two rules and are you allowed to choose?

Answer 1

under FIFO method closing stock represents market value and under LIFO method cost of production represents market value and under weighted average cost method cost differences are adjusted.

standard gives option to entity to follow any method based on conditions existing.

and then entity calculate cost of inventory in any method and standard do not want to abnormal cost differences exceeding market value of inventory so standard ask us to compare the cost of inventory computed under above methods to compare with net realizable value and excess of any cost above net realizable value will be removed from cost of inventory to arrive at closing balance.