Different types of Inventory costing Methods

This article discusses the different types of inventory costing methods, including specific identification, FIFO, LIFO, and weighted average. It explains how each method works, their advantages and disadvantages, and provides a comparison between them. The article concludes by recommending LIFO as the most appropriate method for measuring inventory costs.

Running head: ACCOUNTING INFORMATION
Accounting Information
Name of the Student:
Name of the University:
Author’s Note

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ACCOUNTING INFORMATION
Table of Contents
Part A.........................................................................................................................................2
Part B.........................................................................................................................................4
Different types of Inventory costing Methods.......................................................................4
Comparisons between the Methods.......................................................................................6
Reference...................................................................................................................................8

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Part A
Aged Payables Summary
Outback Camping Supplies Ltd
As at 30 June 2018
Contact Current < 1 Month 1 Month 2 Months 3
Months Older Total
Aged Payables
Camping Enterprises
Ltd 17,875.00 0.00 0.00 0.00 0.00 0.00 17,875.00
Other 6,449.00 0.00 0.00 0.00 0.00 0.00 6,449.00
Outside Lifestyle Ltd 7,634.00 11,560.00 3,000.00 0.00 0.00 0.00 22,194.00
Total Aged Payables 31,958.00 11,560.00 3,000.00 0.00 0.00 0.00 46,518.00
Total 31,958.00 11,560.00 3,000.00 0.00 0.00 0.00 46,518.00
Aged Receivables Summary
Outback Camping Supplies Ltd
As at 30 June 2018
Contact Current < 1 Month 1 Month 2 Months 3 Months Older Total
A. Day 7,425.00 6,894.00 0.00 0.00 0.00 0.00 14,319.00
B.
Morning 5,940.00 8,219.00 0.00 0.00 0.00 0.00 14,159.00
C. Knight 0.00 4,444.00 2,876.0
0 0.00 0.00 0.00 7,320.00
Total 13,365.00 19,557.00 2,876.0
0 0.00 0.00 0.00 35,798.00
Balance Sheet
Outback Camping Supplies Ltd
As at 30 June 2018
Account 30 Jun 2018
Assets
Bank
Business Bank Account 2,02,230.70
Total Bank 2,02,230.70
Current Assets

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ACCOUNTING INFORMATION
Accounts Receivable 35,798.00
Inventory on Hand 2,03,483.00
Office Supplies 4,251.09
Prepayments 405.00
Total Current Assets 2,43,937.09
Fixed Assets
Accumulated Depreciation on Delivery Vehicle (11,980.00)
Accumulated Depreciation Shop Fittings (8,770.00)
Delivery Vehicle 82,000.00
Less Accumulated Depreciation on Office Equipment (10,230.00)
Office Equipment 41,400.00
Shop Fittings 28,612.00
Total Fixed Assets 1,21,032.00
Total Assets 5,67,199.79
Liabilities
Current Liabilities
Accounts Payable 46,518.00
GST 1,582.88
Owner A Funds Introduced 2,28,200.00
Wages Payable - Payroll 2,300.00
Total Current Liabilities 2,78,600.88
Non-current Liabilities
Loan 96,800.00
Total Non-current Liabilities 96,800.00
Total Liabilities 3,75,400.88
Net Assets 1,91,798.91
Equity
Additional share capital 35,000.00
Current Year Earnings (10,754.09)
Retained Earnings 1,67,553.00
Total Equity 1,91,798.91
Profit and Loss
Outback Camping Supplies Ltd
For the year ended 30 June 2018
Account 2018
Gross Profit 0.00
Operating Expenses
Depreciation 1,780.00
Insurance 1,418.18

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Light, Power, Heating 440.91
Rent 1,215.00
Wages and Salaries 5,900.00
Total Operating Expenses 10,754.09
Net Profit (10,754.09)
Part B
Different types of Inventory costing Methods
The management if inventory in a business is considered to be a vital aspect of the
business which can have a direct impact on the profits which is generated by the business. The
costs at which closing inventory of a business are valued and the same is considered to be
important for presenting an appropriate view of the financial position of the business (Gray and
Ehoff Jr 2014). The four most popular methods which are used for measuring the costs of
inventory are listed below in details:
Specific Identification Method
As per this method, the costs of the inventory are measured in the exact costs which is
applicable to the all units. The method is widely used due to the advantage which is provides
regarding accurate match between the revenue and costs of the business (Gaur and Kesavan
2015). The businesses which uses such type of costing technique are automobile industries which
offers very low volume businesses.
The main advantage of Specific Identification Method is to ensure that costs of the
business matches the revenue which is generated by the business. The main drawback which is
associated with the method is that accounts can be manipulated easily which can cause material
misstatement. This sort of drawbacks can hamper the operations of the business.
First-in first out (FIFO) Method

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As per this method, the stock which is produced first are also used for sales first and on
the basis of the same. This method is regarded as the most oldest method which was used for
measuign the costs of the inventory (Zhang et al. 2014). The method is most useful for valuing
perishable products such foods and other perishable products. The method should be applied to a
retail business but such method is applicable to a retail industry.
The advantages which is associated with FIFO method is that the method is very
logical and easy to understand. In addition to this, in times of inflation FIFO method has a
tendency of increasing the value of the remaining stock of the business. The major disadvantage
which can be identified is that the method fails to recognize accurate presentation of costs of the
business which leads to over or under valuation of inventory.
Last-in First out (LIFO) Method
The Last-in first out method works on the assumption that the unit which is
produced by the business at last is clear out first for the purpose of sales (Gaur, Kesavan and
Raman 2014). This method is an exact reverse of FIFO method. This method is mostly applied in
a retail business namely supermarkets.
The advantages of using this method is that the method is more simple and easy to
understand. The method is also effective in matching revenues and expenses of the business in an
appropriate matter. The disadvantage which is associated with LIFO method is that the same
does not reveal the current market price of the business and the method is also regarded to be a
bit more complex in nature.
Weighted Average Method

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The method is the simplest of them all and it considers the average costs of the units and
on the basis of the same valuation of the inventory is done. The method is used in a business
which offers one kind of product in the market and there are not much changes in the products
which is offered by the business.
The advantage of weighted average cost method is that it is steady method and is most
easy to understand while on the other hand the disadvantage is that the presentation of actual
costs of the business becomes an issue under this method.
Comparisons between the Methods
The above discussion effectively shows the methods which are widely used by businesses
for the purpose of measuring the costs of the business. As per the specific identification method,
the management of the company is able to choose which unit is to be costed how much and this
is an exact amount. This method promotes accuracy in the business (Onoja and Abdullahi 2015).
The next method is FIFO method which assumes that the products which is manufactured first
would be sold off first as well. While LIFO method is opposite of FIFO method and it considers
that the products which are manufactured last should be sold off first. This method is mostly
used in super market form of business (Kieso, Weygandt and Warfield 2016). Weighted average
method is used considering all units which are manufactured or purchased and average costs for
the same is considered for valuation of the costs of the inventory of the business.
As per the analysis which is conducted in the above paragraph, it can be said that LIFO
methods is the most appropriate method as it has numerous advantages associated with the same.
One of the major advantage which is associated with LIFO method is that, it provides tax
advantage to the business which is major benefit for the business. Another benefit is that LIFO

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method has a tendency of appropriately following matching principles which makes it a method
where seldom mistakes can be done. Therefore, it can be estimated that LIFO method is the most
appropriate method for measuring the costs of the business. In addition to this. In times of
inflation LIFO method can appropriately value the remaining stock of the business which can be
used for future production process.

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Reference
Gaur, V. and Kesavan, S., 2015. The effects of firm size and sales growth rate on inventory
turnover performance in the US retail sector. In Retail Supply Chain Management (pp. 25-52).
Springer, Boston, MA.
Gaur, V., Kesavan, S. and Raman, A., 2014. Retail inventory: Managing the canary in the coal
mine. California Management Review, 56(2), pp.55-76.
Gray, D. and Ehoff Jr, C., 2014. Lower of cost or market inventory valuation: IFRS versus US
GAAP. Journal of Business & Economics Research.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2016. Intermediate Accounting, Binder Ready
Version. John Wiley & Sons.
Onoja, E.E. and Abdullahi, Y.U., 2015. Inventory valuation practices and reporting: Nigerian
textile industry experience. Mediterranean Journal of Social Sciences, 6(4), p.74.
Zhang, Y., Shi, C., Gao, P. and Wang, F., 2014. Repealing the LIFO inventory accounting
choice? A review of LIFO and inventory management. American Journal of Operations
Research, 4(06), p.351.