00:01
Hello students, so let us look at this question.
00:04
The question is telling how we can determine which inventory costing method to apply when and we have to find the difference and provide example for three methods that is fifo, lifo and average methods.
00:16
Okay, so the determination of which inventory costing method to apply when depend on various factors, factors like various factors like specific needs and circumstances of the company.
00:45
It can either be industry practices, accounting regulations and it can either be tax consideration.
01:18
Okay, so the three commonly used inventory costing methods are the first is fifo, fifo, fifo that is first in first out, first in first out.
01:37
The second is lifo that is last in first out, last in first out and the last but not the least is average cost, average cost.
01:55
So, let us look at the fifo part first.
02:03
Fifo, what does it signifies? it signifies that the first unit of inventory purchased are sold first.
02:14
Simple, the first unit of inventory purchased are sold first.
02:34
Under fifo, the cost of the inventory is either calculated based on the oldest purchases and the cost of the ending inventory is based on the recent purchases as we know.
02:46
So, this method reflects us the assumption of the cost of inventory in a chronological order you can say.
02:56
Let us say for example, a grocery store operates on fifo method.
03:01
You will say how? so, we can say that for perishable goods such as fruits and vegetables, they assume that the first item received as the first one sold to avoid spoilage.
03:13
Otherwise, the fruits and the vegetables will get wasted.
03:19
Fifo is also commonly used in industries where products have short life or short life period you can say and which are more prone to spoilage.
03:30
Example, you can say grocery, grocery stores in that a perishable food item, perishable food items.
03:48
Now, the second one is lifo.
03:53
What does it signify? it tells us last in first out...