What are the three categories of inventory for a manufacturing company quizlet?

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The difference between the inventory method used for internal reporting purposes and LIFO is referred to as Allowance to Reduce Inventory to LIFO, or the LIFO reserve. The change in LIFO reserve is referred to as the LIFO effect. Companies should disclose either the LIFO reserve or the replacement cost of the inventory in the financial statements.

LIFO liquidations match costs from preceding periods against sales revenues reported in current dollars. This distorts net income and results in increased taxable income in the current period. LIFO liquidations can occur frequently when using a specific-goods LIFO approach.

For the dollar-value LIFO method, companies determine and measure increases and decreases in a pool in terms of total dollar value, not the physical quantity of the goods in the inventory pool.

The major advantages of LIFO are the following. (1) It matches recent costs against current revenues to provide a better measure of current earnings. (2) As long as the price level increases and inventory quantities do not decrease, a deferral of income tax occurs in LIFO. (3) Because of the deferral of income tax, cash flow improves. Major disadvantages are (1) reduced earnings, (2) understated inventory, (3) does not approximate physical flow of the items except in peculiar situations, and (4) involuntary liquidation issues.

Companies ordinarily prefer LIFO in the following circumstances: (1) if selling prices and revenues have been increasing faster than costs and (2) if a company has a fairly constant "base stock." Conversely, LIFO would probably not be appropriate in the following circumstances: (1) if sale prices tend to lag behind costs, (2) if specific identification is traditional, and (3) when unit costs tend to decrease as production increases, thereby nullifying the tax benefit that LIFO might provide.

By their nature, product costs "attach" to the inventory and are recorded in the inventory account. These costs are directly connected with the bringing of goods to the place of business of the buyer and converting such goods to a salable condition. Such charges would include freight charges on goods purchased, other direct costs of acquisition, and labor and other production costs incurred in processing the goods up to the time of sale.

Period costs are not considered to be directly related to the acquisition or production of goods and therefore are not considered to be a part of inventories.

Conceptually, these expenses are as much a cost of the product as the initial purchase price and related freight charges attached to the product. While selling expenses are generally considered as more directly related to the cost of goods sold than to the unsold inventory, in most cases, though, the costs, especially administrative expenses, are so unrelated or indirectly related to the immediate production process that any allocation is purely arbitrary.

Interest costs are considered a cost of financing and are generally expensed as incurred, when related to getting inventories ready for sale.

The first-in, first-out method approximates the specific identification method when the physical flow of goods is on a FIFO basis. When the goods are subject to spoilage or deterioration, FIFO is particularly appropriate. In comparison to the specific identification method, an attractive aspect of FIFO is the elimination of the danger of artificial determination of income by the selection of advantageously priced items to be sold. The basic assumption is that costs should be charged in the order in which they are incurred. As a result, the inventories are stated at the latest costs. Where the inventory is consumed and valued in the FIFO manner, there is no accounting recognition of unrealized gain or loss. A criticism of the FIFO method is that it maximizes the effects of price fluctuations upon reported income because current revenue is matched with the oldest costs which are probably least similar to current replacement costs. On the other hand, this method produces a balance sheet value for the asset close to current replacement costs. It is claimed that FIFO is deceptive when used in a period of rising prices because the reported income is not fully available since a part of it must be used to replace inventory at higher cost.

The results achieved by the average-cost method resemble those of the specific identification method where items are chosen at random or there is a rapid inventory turnover. Compared with the specific identification method, the average-cost method has the advantage that the goods need not be individually identified; therefore accounting is not so costly and the method can be applied to fungible goods. The average-cost method is also appropriate when there is no marked trend in price changes. In opposition, it is argued that the method is illogical. Since it assumes that all sales are made proportionally from all purchases and that inventories will always include units from the first purchases, it is argued that the method is illogical because it is contrary to the chronological flow of goods. In addition, in periods of price changes there is a lag between current costs and costs assigned to income or to the valuation of inventories.

If it is assumed that actual cost is the appropriate method of valuing inventories, last-in, first-out is not theoretically correct. In general, LIFO is directly adverse to the specific identification method because the goods are not valued in accordance with their usual physical flow. An exception is the application of LIFO to piled coal or ores which are more or less consumed in a LIFO manner. Proponents argue that LIFO provides a better matching of current costs and revenues.

During periods of sharp price movements, LIFO has a stabilizing effect upon reported income figures because it eliminates paper income and losses on inventory and smoothes the impact of income taxes. LIFO opponents object to the method principally because the inventory valuation reported in the balance sheet could be seriously misleading. The profit figures can be artificially influenced by management through contracting or expanding inventory quantities. Temporary involuntary depletion of LIFO inventories would distort current income by the previously unrecognized price gains or losses applicable to the inventory reduction.

Under the double extension method, LIFO inventory is priced at both base-year costs and current-year costs. The total current-year cost of the inventory is divided by the total base-year cost to obtain the current-year index.

The index for the LIFO pool consisting of product A and product B is computed as follows:

Base-Year Cost Current-Year CostProduct Units Unit Total Unit TotalA 25,500 $10.20 $260,100 $21.00 $ 535,500B 10,350 $37.00 382,950 $45.60 471,960December 31, 2014 inventory $643,050 $1,007,460

Current-Year Cost/Base-Year Cost =$1,007,460/$643,050= 156.67, index at 12/31/14.

On December 31, 2013, the inventory of PowhattanCompany amounts to $800,000. During 2014, the companydecides to use the dollar-value LIFO method ofcosting inventories. On December 31, 2014, the inventoryis $1,053,000 at December 31, 2014, prices. Using theDecember 31, 2013, price level of 100 and the December31, 2014, price level of 108, compute the inventory value atDecember 31, 2014, under the dollar-value LIFO method.

December 31, 2014 inventory at December 31, 2013 prices, $1,053,000 ÷ 1.08..........................$975,000Less: Inventory, December 31, 2013 .........................................................................................800,000Increment added during 2014 at base prices ........................................................................................$175,000

Increment added during 2014 at December 31, 2014 prices, $175,000 X 1.08.................................$189,000Add: Inventory at December 31, 2013 ............................................................................................800,000Inventory, December 31, 2014, under dollar-value LIFO method..................................$989,000

What are the three main categories of inventories in a manufacturing company?

What are the three categories of inventory for a manufacturing company multiple select question?

What are the 3 types of inventory that make up product costs for manufacturing companies?

What are the three categories of inventory for a manufacturing company multiple select question raw materials work in process finished goods Cost of goods sold?