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I believe there are3 methods. FIFO, LIFO and Average cost. Without inflation all methods would produce same results. However, prices do tend to rise over the years and the company's costing method affects the valuation ratios.
FIFO - First In First Out gives more accurate value for ending inventory on the balance sheet. But it also increases net income and increase net income can increase your tax.
LIFO - Last In First Out, during period of inflation shows ending inventory on the balance sheet at much lower than what is truly worth at current prices which lower net income due to higher cost of goods sold.
Average Cost method takes a weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of cost of goods sold and inventory value. This is easiest method.
Conclusion depends on your company policies, but I would prefer Average cost.
The question is very open; size of industry doesn't matter; type does. average cost will suit generally.
Applying one of the three methods has to be decided depend of the type of industry or product. Example the industry which deals with potential projects and project wise purchases for that FIFO is best. so that inventory levels and project wise profit loss will be more accurate. But if you are dealing with retail business then weighted average (Average price) is best. And if you are dealing with product which is monitor by government or for volatile market LIFO is best.
First In First Out
Last In First Out
Depends on industries required the methods for FMCG its required FIFO and retailers BIN system, For W/H retailers WMS system, Of course LIFO and Average coast according market trends.
Periodic inventory
Continuous inventory
i think continuous inventory is the best
There are three basis approaches to valuing inventory that are allowed by GAAP -(a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.(b) Last-in, First-out (LIFO): Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income.(c) Weighted Average: Under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO.
Firms often adopt the LIFO approach for the tax benefits during periods of high inflation, and studies indicate that firms with the following characteristics are more likely to adopt LIFO - rising prices for raw materials and labor, more variable inventory growth, an absence of other tax loss carry forwards, and large size. When firms switch from FIFO to LIFO in valuing inventory, there is likely to be a drop in net income and a concurrent increase in cash flows (because of the tax savings). The reverse will apply when firms switch from LIFO to FIFO.
Given the income and cash flow effects of inventory valuation methods, it is often difficult to compare firms that use different methods. There is, however, one way of adjusting for these differences. Firms that choose to use the LIFO approach to value inventories have to specify in a footnote the difference in inventory valuation between FIFO and LIFO, and this difference is termed the LIFO reserve. This can be used to adjust the beginning and ending inventories, and consequently the cost of goods sold, and to restate income based upon FIFO valuation.
FIFO is suitable for large industries to avoid LOSS/EXPIRY/Damage of stocks.
It depends on the Industry. I would prefer Average cost method in big Retail companies like Wal-Mart and FIFO in the companies which makes luxury items like ferrari product etc.
follow minimum stock Qty.
inventory level maintain.
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