First, it does not allow any manipulation of income. There are various advantages using FIFO method. Thus, the ending inventory is Rs 27,100 and the cost of goods sold is Rs 16,800 as per this method. Purchases made on October 8 (2000 units Rs 4.00 = Rs 8,000) and. ![]() This impacts the accuracy of Specific Identification Method.Īs per the above table, sales made on Octousing FIFO method comprise of: Therefore, in such cases the business owners are bound to allocate such costs arbitrarily. For instance, discounts, shipping charges and storage costs are difficult to allocate directly to a given inventory. ![]() The second disadvantage of using this method is associated with arbitrary allocation of certain costs to the inventory items. He can either choose lowest or highest price and attribute it to a particular lot of paper to be sold to the customer. Now, the wholesaler can manipulate the net income at the time of selling the paper. Say for instance, a wholesaler purchased same quality paper during the year at three different prices. However, there are certain disadvantages of using Specific Identification Method for valuing inventory.įirst, it is easy for the business owner to manipulate the net income under this method. It simply means that the cost flow matched the physical flow of goods. Thus closing inventory was computed at actual cost. This is because actual costs matched with the actual revenue. It was ideal for Kapoor Mart to use Specific Identification Method. Also, let’s figure out what are the various inventory valuation methods that can be used to evaluate inventory.Ĭost of goods available for sale (figures taken from the above table) Rs 43,900 So, let’s understand how to price inventory in accounting as a small business owner. Further, it can impact the purchase planning and pricing decisions of small scale enterprises. Eventually, use of such incorrect values may turn out to be risky for SMEs. This is because use of incorrect inventory valuation method can lead to incorrect reporting of profit. Thus, it was evident that inventory valuation is an important aspect of accounting for SMEs. In addition to this, the study revealed that inventory formed more than 50% of the product cost in case of manufacturing SMEs. Further, 73% of the companies did not know the importance of the relationship between the Profit Before Tax and the closing inventory value. ![]() However, they used this method without knowing if it was relevant for their industry. Eventually, the study revealed that 62% of the firms used First In First Out (FIFO) Method to evaluate inventory. These respondents belonged to industries ranging from Chemicals, Pharma to Cement and Furniture. Determine the suitability of the inventory valuation method as against the ideal method.Ascertain inventory valuation methods used by SMEs and.A research study was conducted on 100 Indian Small and Medium Enterprises (SMEs) in the manufacturing sector.
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