Week 41 Day 3 Action Items

Day 3

Inventory Costing Methods

  1. First-In, First-Out (FIFO): Under FIFO, the cost of the oldest inventory (first in) is assigned to goods sold first, while the cost of the most recent inventory (last in) is assigned to ending inventory. This method assumes that inventory is used or sold in the order it was acquired.
  2. Last-In, First-Out (LIFO): LIFO assumes that the cost of the most recent inventory (last in) is assigned to goods sold first, while the cost of the oldest inventory (first in) is assigned to ending inventory. This method reflects the assumption that the most recent costs are matched with revenue.
  3. Weighted Average Cost: The weighted average cost method calculates the average cost of inventory by dividing the total cost of goods available for sale by the total number of units available for sale. This average cost is then applied to both goods sold and ending inventory.
  4. Specific Identification: Under specific identification, the actual cost of each individual item in inventory is tracked and assigned to goods sold or ending inventory. This method is commonly used for items with unique or high-value characteristics, such as vehicles or jewelry.
  5. Standard Costing: Standard costing involves setting predetermined standard costs for materials, labor, and overhead, which are used to value inventory and determine the cost of goods sold. Variances between standard and actual costs are analyzed to assess performance.
  6. Retail Inventory Method: The retail inventory method is commonly used by retailers to estimate the value of inventory based on the retail selling price and a predetermined cost-to-retail ratio. This method is particularly useful for businesses with diverse product lines and frequent price changes.

Each inventory costing method has its advantages and disadvantages, and the choice of method can impact financial statements, tax obligations, and inventory management practices. Businesses often select the most appropriate inventory costing method based on factors such as industry norms, regulatory requirements, financial reporting objectives, and the nature of their inventory.

Inventory Turnover

Inventory turnover is a financial metric that measures how efficiently a company manages its inventory by assessing the number of times inventory is sold or replaced within a specific period, typically a year. It indicates how quickly inventory is being sold and replenished, providing insight into inventory management practices and the effectiveness of sales and purchasing strategies.

The formula for inventory turnover is:

$$ \text{Inventory Turnover} = \text{Cost of Goods Sold}/\text{Average Inventory} $$

Where: