good such as milk bread and chesse would problably be costed using what method of inventory costing
FIFO
The method of inventory costing usually used for perishable goods such as milk, bread, and cheese is known as "First-In, First-Out" (FIFO).
To understand how this method works, we should first grasp the concept of inventory costing. Inventory costing is a way of assigning costs to the goods that a company sells in order to determine the value of its inventory. It is crucial for accurate financial reporting and profitability analysis.
In the case of FIFO, the assumption is that the first items purchased or produced are the first ones sold. This means that the cost of the oldest inventory is assigned to the items sold, while the cost of the newest inventory is assigned to items that remain in the inventory.
To further illustrate this, let's assume a company purchases 100 units of milk, bread, and cheese throughout a specific period:
- On Day 1: 50 units are bought at $1/unit.
- On Day 5: 30 units are bought at $1.2/unit.
- On Day 10: 20 units are bought at $1.5/unit.
If the company sells 60 units on Day 12, following the FIFO method, the cost of goods sold (COGS) would be calculated as follows:
- 50 units (from Day 1) at $1/unit = $50
- 10 units (from Day 5) at $1.2/unit = $12
- Total COGS would be $50 + $12 = $62.
As a result, the remaining 40 units in the inventory would be valued using the cost of the most recent purchase (Day 10), which is $1.5/unit.
It is important to note that FIFO assumes that the items sold are the oldest ones available, even if this isn't practically the case. This method allows companies to value their inventory at current or near-current market prices, as more recently purchased goods are more likely to reflect current market conditions accurately.
Ultimately, by applying the FIFO method, companies can accurately assess the cost of goods sold and the value of the remaining inventory, aiding in financial decision-making and profit analysis.