a. Some risk associated with holding inventory are that the cost of the inventory until it is sold (money tied up in inventory could be used in other areas), cost to store inventory, and the inventory could lose its value if stored to long (degradation, no longer in demand). Some benefits associated with holding high inventory are quantity discounts and reduction in lead time to quickly meet customer demand.
b. The cost in raw materials will be direct materials and indirect materials not yet needed in work in process. The cost in WIP will be direct materials needed for production, direct labor, indirect labor, indirect materials needed and overhead. These cost that create the product become the cost of goods manufactured. The cost of goods manufactured is the cost I expect to be in the finished goods inventory.
c. Cost flow assumptions are necessary because of inflation and the changing costs companies’ experience. If costs were stable it wouldn’t matter how costs were flowed.
Inventory cost flow assumptions are necessary to determine the cost of goods sold and ending inventory. Companies make certain assumptions about which goods are sold and which remain in inventory creating different accounting methodologies. Only requirement regardless of method used is that total cost of goods sold plus the cost of goods remaining in the ending inventory for financial and tax purposes are equal to the actual cost of goods available.
FIFO, LIFO, and weighted average are come methods used to account for inventory. FIFO assigns first costs incurred to COGS on income statement. LIFO assigns last costs incurred to COGS on the income statement and if using a weighted average method a company would assign average cost incurred to COGS on income statement.
Deere and Company uses LIFO costing method.
Assuming that prices are increasing, FIFO gives a better indication of the value of ending inventory (on the balance sheet), but it also increases...
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