![]() If you do not have a very good IT system, then either weighted average cost method or LIFO will do Saibal Ray, James McGill Professor So, if you have a very good IT system, then perhaps FIFO is perhaps the most natural way to think about accounting. However, he also points out that FIFO is the most equitable accounting method.įIFO is perhaps the most fair method, but with FIFO you have to keep track of exactly when you bought the product and exactly when it’s being sold. If you are selling today at a high price, but you are selling products which you bought two years back, that means your profit margins will be quite high, especially if you are using FIFO, and that means your taxes will be high,” he says. ![]() “Today, in a very high-inflation environment, the inventory that you bought in the last month is quite expensive, but the inventory that you bought two years back is not that expensive. Ray warns that using the FIFO method can inflate your profit margins, which can result in a higher tax burden for your business. Therefore, the cost of the oldest items is reported in the company’s financial statements.ĭr. FIFO uses the COGS for the items that were purchased first and divides it by the number of units purchased. The First In, First Out (FIFO) method assumes that customers are buying the oldest pieces of inventory in stock. When the weighted average cost method is no longer useful, that’s when other accounting methods, like FIFO and LIFO, come in handy. But, from a pure accounting viewpoint, this method is a bit problematic, because you do not know what you bought at what price.” Ray continues, “This model is a good thing from a managerial viewpoint, because it is easier to understand how much your inventory costs on average. The weighted average cost method gives you an overall idea about the inventory you have on hand and how much it costs. When you have a lot of inventory on hand and you do not know the order in which you are selling it, you are mixing all of your units. ![]() It’s best to use when it’s too logistically complicated to distinguish each individual unit of inventory and know how much you paid for it. Each strategy has its own best-use cases.Īs noted, the weighted average cost method divides COGS by the total number of units in the inventory. FIFO and LIFO are other costing methods that are typically used alongside the weighted average. ![]() The weighted average cost method is just one strategy for valuing your inventory. ![]()
0 Comments
Leave a Reply. |