Question

Question:Refer to Short Exercises S6-4 through S6-6. After completing those exercises, answer the following questions:

Requirements

3. If costs had been declining instead of rising, which inventory costing methodwould have produced the highest cost of goods sold?

Short answer

Under declining cost conditions FIFO would yield the highest cost.

Step-by-step solution

Step-by-Step-SolutionStep1: COGS computed under methods

The inventory methods used in the previous exercises used inventory methods namely – FIFO, LIFO, and Weighted Average Cost

FIFO computes the COGS at the historical prices. LIFO computes the cost at the current prices, and the average method takes the mid-value between the FIFO valuation and LIFO valuation.

Declining cost condition and highest COGS

If the cost is being declined, so the current cost would be lower than the historical prices. As discussed above, the FIFO value stock on the historical prices and LIFO on the current prices.

Thus in case of declining prices, the inventory value on the historical cost would be highest than the inventory valued on the current cost.

The inventory valued by the average method would still take the mid-value.

So under the declining cot method, FIFO would yield the highest cost.