Question

Refer to the information in Problem 5-3A and assume the periodic inventory system is used

Required

Analysis Component

5. If the company’s manager earns a bonus based on a percentage of gross profit, which method of inventory costing will the manager likely prefer?

Short answer

The manager for inventory valuation willprefer the FIFO method.

Step-by-step solution

FIFO

A method that allocates initial or oldest inventory cost to the goods sold is known as FIFO. Under this method, the cost allocated is lower, and the resulting gross profit will be higher.

Method Preferred by the Manager

The manager will prefer to determine the cost of inventory using the FIFO method because it generates higher gross profit, and the manager will get higher compensation compared to other inventory valuation methods.