Topic
to be tested:
LIFO-FIFO Costing methods
Learning
objectives:
To learn
about the practical implementation of costing methods for proper inventory
management
Discussion Question:
Silver Corporation (SC) - an oil refining company is
dealing in oil refining and marketing business for the last two years. The
company has centralized decision making system, so all the decisions are made
by the top level management at its head office located at Oil City
After detailed observation, the analyst concluded that the
company needs to improve its inventory costing system. He argued that, if the
company successfully manages the inventory then the cost will be reduced
remarkably.
On the basis of the analyst’s recommendations, the
management assigned a task of improving its inventory costing system to Mr.
White – Operations Manager, and Mr. Blue – Store Manager. They designed an
initial inspection plan to analyze the inventory movements during different
frame of periods. Their intention was to search and recommend at least the most
efficient inventory costing system. After completing the analysis, both the
managers came up two different recommendations – Mr. White recommended the use
of FIFO costing method as this will lower the company’s taxable income. Whereas, Mr. Blue came up with the
suggestion to adopt LIFO costing method as this may help the company in
acquiring loan from any bank.
The management feels it difficult to decide which one of
these two to adopt, as both are conducive.
Requirement:
As a student of cost accounting you are
asked to help the SC management that either the recommendations given by both
managers (Mr. White & Mr. Blue) are appropriates for inflationary period
(Ignore IAS – 2 on Inventory) or not? Support your answer with logical
reasoning.
1. Your discussion must be based on logical
facts.
2. The GDB will remain open for 2
working days/ 48 hours.
3. Do not copy or exchange your answer with other
students. Two identical / copied comments will be marked Zero (0) and may
damage your grade in the course.
4. Obnoxious or ignoble answer should be strictly
avoided.
5. Questions / queries related to the content of the GDB,
which may be posted by the students on MDB or via e-mail, will not be replied
till the due date of GDB is over.
For Detailed Instructions please see the GDB Announcement
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Solution Idea
By
using LIFO when the costs of products are increasing, the company will be
matching the recent higher costs with the current period sales. This will
provide not only the improved matching of costs with revenues; it will also
result in lower taxable income
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