The selling price per unit is $40.00 December of the previous year 10,000 Januar

Question

The selling price per unit is $40.00

December of the previous year 10,000

January                                                40,000

February                                  60,000

March                                      100,000

April                                        70,000

2. Prepare a purchases budget for January through March, and the first quarter in total. Assume that the company only sells one product that can be purchased at $15.00 per unit. The market for this product is very competitive and customers highly value service such as quality and on time delivery of the product. Also assume that currently it is company policy that ending inventory should equal 50% of next month’s projected sales.

Explanation / Answer

The three inventory policies and their analysis are as provided below:
1) FIFO (First-In-First-Out) Method: Under this method, inventories are procured on the different dates by the company. Now when the company sells goods, the Cost of Goods Sold (CoGS) is considered against the inventory that was first procured and likewise.

2) LIFO (Last-In-First-Out) Method: Under this method, inventories are procured on the different dates by the company. Now when the company sells goods, the Cost of Goods Sold (CoGS) is considered against the inventory that was recently procured and likewise.

3) Weighted Average Method: Under this method, inventories are procured on the different dates by the company. Next when the company sells goods, the CoGS is considered as the weighted average of the inventories procured till the particular date (date on which sell is being made).

Now, the Weighted Average Method gives more holistic view of the valuation of the inventories by considering the cost of each good procured till a specific date. On the other hand, the FIFO and LIFO gives more credit only to the last and the recent procurements, respectively. Therefore, the company must choose Weighted Average Method of inventory valuation.

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