COST ACCOUNTING
METHODS OF COSTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Cost of Goods Sold (COGS) is based on oldest purchases.
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Ending inventory reflects current replacement cost.
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First units to be purchased by the business are the first to be sold.
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Only A and C are true.
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A, B, and C are true.
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Detailed explanation-1: -FIFO usually results in higher inventory balances on the balance sheet during inflationary periods. It also results in higher net income as the cost of goods sold is usually lower. While this may be seen as better, it may also result in a higher tax liability.
Detailed explanation-2: -What is FIFO costing? In simplest terms, FIFO (first-in, first-out) costing allows you to track the cost of an item/SKU based on its cost at purchase order receipt, and apply this cost against each shipment of the item until the receipt quantity is exhausted.
Detailed explanation-3: -A FIFO method does not follow the physical flow of goods when costing an inventory. Based on the FIFO method, the first manufactured or purchased products will be sold or issued to the customer first; here, no physical goods are considered.
Detailed explanation-4: -From the choices given, the people in a queue will move out in the order they joined the queue. So it is an example of FIFO, First In First Out.