Fixed and Variable Costs
Running head: COSTING METHODS 1
Costing Methods 3
COSTING METHODS
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Costing method is a technique used by firms to determine the value of its inventory. The standard costing methods are LIFO, FIFO, and the weighted average. In the beginning, the Ford Company was using the LIFO method but lat er opted to use the FIFO method (Jones, 2015). The LIFO method operates in such a way the goods that come last in the firm are the first to be sold. This means all the products are sold at higher prices based on the value of the previous production. The FIFO method which is the current costing method used. The technique requires that the output sells goods.
The first products to be produced are the ones to be sold. This ensures that the products are sold when their market is still prime and not delaying until the order goes down. The FIFO method was used to ensure that products do not remain in the store for long. For example under LIFO the firm produces spare parts but because people require the modern make they are sold first, in the FIFO the firm provides the spare parts but clears stock of the previous production before giving the next bunch into the market (Jones, 2015).
The two methods are essential in costing the inventory of the Ford Company. The use of LIFO ensures that the values used in taxation are always low thus the firm attains more profit. On the FIFO side its use it gives a better indication of the value of the inventory at the end of the accounting period and raises the net income of the firm because the items which are old in the firm are still used in getting the total cost. Finally, both the methods are easy to use and give the accountants easy time during the evaluation of the value of the inventories (Palewatta & Perrera, 2017).
References
Jones, P. (2015). Budgeting, costing and estimating for the injection moulding industry. Shrewsbury: I Smithers.
Palewatta, I., & Perrera, H. (2017). Inventory Optimization using ERP to reduce final product lead time, Inventory value an inbound logistics cost for MTO, FMCG Company. International Journal of Multidisciplinary Studies, 3(2), 53. http://dx.doi.org/10.4038/ijms.v3i2.7
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