Q24RQ - Horngren'S Financial And Managerial Accounting

Question

When might it be beneficial for a company to use the FIFO method? When is the weighted-average method more practical?

Step-by-Step Solution

Answer

The FIFO method is beneficial when the cost changes significantly, and the weighted average method is beneficial when the cost is not changing significantly.

Step-by-Step Solution: Step 1: Inventory Valuation Method

Inventory valuation can be done by First in, first out, last-in, first-out, or the weighted average method. Each method gives a different inventory valuation. Generally, most companies use the FIFO method.

 

Step 2: The situation in which the FIFO method is beneficial

The FIFO method is more useful in companies working in an industry where cost changes significantly.

Step 3: The situation in which the weighted average method is beneficial

The weighted average method is beneficial when the business operates in an industry that does not experience significant cost change.