Question

6.You are the inventory manager for a trendy urban retail inventory merchandiser. Your compen- sation includes a bonus plan based on the amount of gross profit reported in the financial state- ments. Your supervisor comes to you and asks your opinion about changing the inventory costing method from moving weighted average to FIFO. Since costs have been rising and are expected to continue to rise, your superior predicts the company will be more attractive to investors because of the reported higher profit using FIFO. You realize this proposed change will likely increase your bonus as well. What do you recommend?

Answer 1

I would recommend to keep using the average method. Though for short term it would be profitable to use FIFO method , but sice the costs are rising , in the later year gross profit would be lower. If weighted average method is used, there would be consistent earning . Also it is not the only responsibility to attract the investors but also to faithfully represent the financial statements to the investors so that they can take informed decision. The gross profit would fall in the later years which would upset the investors. Every member in the organisation is responsible for the reputation and image of the company. So for the company to be fair and just, it needs to continue with weighted average method of valuation..