Goods such as milk, bread, and cheese would probably be costed using the _______ method of inventory costing.
Goods such as milk, bread, and cheese would probably be costed using the "FIFO" (First-In-First-Out) method of inventory costing.
To understand why this method is used, let's break it down and explain how it works:
1. FIFO Method:
The FIFO method of inventory costing assumes that the first goods purchased or produced are the first ones sold. In other words, the oldest items are the first to be used or sold. This method is based on the idea that as time goes on, costs tend to increase due to factors such as inflation, so it is better to allocate the older, lower-cost inventory to the cost of goods sold (COGS).
2. How it works:
To apply the FIFO method, the company keeps track of the inventory quantities it purchases or produces and the prices paid for each batch. When items are sold, the cost is calculated by using the oldest batch of inventory first. By doing so, the company ensures that the cost of goods sold reflects the older, lower-cost items, while the ending inventory (unsold goods) reflects the latest, higher-cost items.
3. Example:
Let's say a store buys milk, bread, and cheese on different dates at different prices. If the store sells these items later, it will first allocate the cost of the oldest batch of milk, then bread, and finally cheese to the cost of goods sold. The ending inventory will comprise the most recently purchased or produced items.
4. Suitable for perishable goods:
The FIFO method is particularly suitable for products with short shelf lives, like perishable goods, because it ensures that the oldest inventory is used or sold first. This helps to minimize waste or spoilage of inventory.
In summary, the goods such as milk, bread, and cheese would probably be costed using the FIFO method of inventory costing because it matches the realistic flow of goods in these perishable product categories.