Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

8RQ

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 357

Short Answer

During periods of rising costs, which inventory costing method produces the highest gross profit?

The average cost is computed after making every purchase.

See the step by step solution

Step by Step Solution

Different inventory costing methods

There are four inventory costing methods namely –

1) Specific identification cost

2) First in First out (FIFO)

3) Last in First out (LIFO)

4) And the Weighted average cost

In specific identification, the specific cost is used for each inventory issue. Under the first in first out method, the cost of inventory introduced first into the stocks is used first. The last in first out method values the inventory based on the latest inventory cost. The average costing method is based on calculating the average cost after each purchase.

Inventory costing during rising prices.

During rising prices, the current cost of inventory is highest as compared to the earlier price. Thus, the inventory valued on the current cost would be the highest. The highest cost of inventory would fetch the lower gross profit. There would be the same opposite effect if the inventories are valued at the earliest price and not at the current price.

Under the FIFO method, the inventories are valued at the earliest price. So the cost of goods sold would be lowest and the gross profit would be highest as compared to any other method.

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.