As Production manager of a manufacturing company you must determine the best inventory costing system to implement. What are the key factors that must be considered before making the determination.

Answer :

There are three famous inventory costing system which are followed by most of the organisation to cost their inventories around the world -

1- First in First Out (FIFO)

2- Last in First Out (LIFO)

3- Weighted Average Cost (WAC)

1- FIFO: Under this system, goods purchased first issued/sold first. This is best for the fast moving goods company. As the which goods are purchased first are sold first due to perishable nature and goods are not kept in store for long term to avoid unnecessary loss .

2- LIFO- Under this system goods purchased last, are sold or issue first for production or sale. This method is used, for the goods whose price change regularly and the latest purchased goods are sold immediately to remove the fear of market fluctuation. This is widely accepted in USA. It shows lower cost of goods sold than FIFO too which result into lower tax burden.

3- Weighted Average Method : Under this method the cost of goods available for sale is divided by the number of units available for sale, which gives the weighted-average cost per unit. The cost of goods available for sale is the sum of beginning inventory and net purchases. This method i complex to calculated.

As a production manager, the best inventory costing system can be selected only by analysing the nature of the work of the company and which provide maximum benefit to the company, in terms of tax minimization, product optimization, less inventory cost and optimum safety level. By analyzing these things only best inventory costing system can be adopted.