Thursday, November 15, 2012

MGT402 GDB Solution due date 15-11-2012

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. Due to poor economic conditions in the country, the prices of inputs have risen to an abnormal hike. Due to this inflationary pressure, the companies are facing with the higher cost of production and this has ruined the corporate profits. To tackle this alarming situation, SC has appointed a certified cost analyst to figure out the main cost issue.

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.

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.

Important Instructions:

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


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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