Why different inventory methods are used for different industries

: Why different inventory methods are used for different industries

Introduction

This seeks analyze and discuss the why different inventory methods are used for different industries . In so doing making the analysis , this asserts that different kinds of industries have different goods and services and even environments hat will influence the kind of inventory systems and inventory methods that they use . In addition , this also posits are the act of management of adopt an inventory method is basically governed by the principle of cost benefit analysis

Analysis and Discussion p

The inventory methods include the FIFO and LIFO , FIFO means first in first out , so that in period of rising prices , what remains in the inventory as cost pertain to those goods purchased at later and therefore higher prices . Higher cost of ending inventory means higher income and higher income means higher tax . Using FIFO therefore will bring higher taxes than using LIFO , which is the opposite of FIFO , where cost in inventory pertain for cost of earlier purchases and therefore at lower cost . Since lower cost of inventory also means lower income , the company using the LIFO must be benefiting from tax benefits . Other kinds of inventory methods include the average method and the specific identification method . Average inventory method just produces a cost flow based on a weighted average of unit costs and it produces results that are in between the LIFO and FIFO methods ' Specific identification is the actually to be the most basic method as this could be used only when the company can actually identify the actual cost associated with a particular unit or product and is generally applicable when products are homogenous (Meigs and Meigs , 1995 . The first three methods could actually be considered as using cost flow assumptions which need not follow the movement of the product

Certain industries have goods that are few in quantity but big items like the plane and ships manufacturers , or separate items but have high cost like fine jewelry companies

while some industries have voluminous goods but small ones or of lesser values like the department stores . Inventory methods could be used between two types of inventory systems - the perpetual and the periodic As to what distinguishes the two , perpetual system requires accounting records to show the amount of inventory on hand at all times , thus the need to maintain a separate account in the subsidiary ledger for each good in stock , which must be updated each time a quantity is added or taken out . Under the periodic inventory system , the inventory is not updated as sales account gets recorded , thus necessitating the taking of physical count at the end of the year to determine

the cost of goods sold (Petroff , 1991 . This does not mean however that in perpetual inventory physical count should not be conducted , however such is minimized or is as not as compelling as in periodic system because of the updated records under the perpetual system . Between the plane and ship...