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Chapter 6

ACC 100 Chapter 6: Inventory Costing & Control

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ACC 100
Maurizio Di Maio

Chapter 6 Inventory Costing Control The cost of inventory is not consistent; it changes with almost every purchase The perunit costs of inventory are important for businesses to record all transactions at the correct amount This allows the business owner to make important decisions about merchandising operations, such as what the selling price should be There are three types of inventory tracking systems: Specific Identification = the cost of every single item of inventory is calculated and the item is tagged with the cost This method is used by businesses that carry unique items of inventory Average Cost = the cost of all the items are added together and then divided by the number of items in the group Every item of inventory appears to cost the same price FirstIn, FirstOut (FIFO) = the cost of the first items purchased is assigned to the cost of the first items sold Businesses with homogeneous items of inventory choose between Average Cost and FIFO based on which method best matches the physical flow of goods Business Owners Managers = need to know how much inventory a business has throughout the year in order to avoid losing potential sales as a result of running out of popular inventory items Having too much inventory on hand is just as bad as having too little inventory It is expensive to store inventory as this requires additional space Additional inventory is not generating revenue despite its initial expense Inventory that goes a long time without being sold is at a higher risk of becoming obsolete As a result, it may be sold for less than it cost to buy JustInTime Inventory System = aims to have just enough inventory on hand This allows businesses to keep their costs down and avoids the problem of inventory becoming damagedobsolete Computerized inventory records do not always match physical inventory due to shrinkageshoplifting, human error, damage, and obsolescence Checking the value of inventory against the market system is important to the following stakeholders: Creditors = as part of the loan agreement, creditors may collect a business assets as collateral Managers = helps them make decisions about which products to carry in the future
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