![]() ![]() ![]() Since there are only a few items to keep track of, it’s easiest and most accurate to keep a record of the actual cost of each item. Businesses with high-value, small-volume items: If your business deals with a small volume of high-value items, such as jewelry and vehicles, then it’s best to use the specific identification method.Hence, the IRS requires companies to use LIFO for bookkeeping purposes if they also use it for tax purposes. That’s why some businesses use LIFO to get tax savings because of a lower taxable income. Businesses using LIFO for tax purposes: The LIFO method of inventory costing yields the lowest net income during periods of increasing costs.If you don’t frequently purchase merchandise to replenish stocks, then you might prefer to use FIFO to match cost flow assumption with the physical flow of goods. Businesses with relatively low purchase volumes: The essence of the average cost method is to compute the average inventory cost every time you purchase inventory.You need not keep track of purchase dates and layers to determine inventory cost. Businesses looking for a simple inventory costing method: The AVCO method is the most straightforward inventory cost flow assumption to implement.It’s better to use the average cost method to make it easier to cost agricultural products without assigning a unit cost manually. ![]() Businesses selling agricultural produce: Maintaining the individual unit cost of agricultural produce is demanding since most are sold in bulk.For companies selling these products, the AVCO method best depicts their relationship by commingling them into one average unit cost. Businesses with highly intertwined products: Products that are highly intertwined, or complementary goods, have limited use if used individually.With the average cost method, you can smooth fluctuations in inventory prices by computing the average inventory cost per unit. Businesses with fluctuating inventory prices: Prices change because of economic and market conditions that companies can’t control, such as increases in the price of crude oil affect the price of other goods. ![]()
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