Question

Give at least two reasons why cost flow assumptions are still necessary for inventory costing purposes and your opinion on whether specific identification and weighted average costing (i.e., eliminating FIFO and LIFO) would be sufficient cost flow methods.

Answer 1

Cost flow assumptions are still necessary for inventory costing purpose due to following reasons

· It helps in closing inventory valuation on consistent basis

· It helps in inventory control through ensuring physical lots move in line with costing method used

· It helps in calculation of cost of goods sold for income statement purpose

Specific identification method:

Specific identification method of inventory costing is suitable for firms which are having high value items and lower unit stocks. The cost of implementation of this inventory system is higher and hence it cannot be implemented in firms having huge inventory items with low values.

Weighted average cost method:

Weighted average cost method of inventory costing is suitable for firms which are having huge fluctuations of price and the firm wants to even out the price between cost of goods sold and closing inventory . It can be used in firms having seasonal fluctuations in price.