Question

List 4 types of inventory evaluation and management with a short description

Answer 1

4 types of inventory evaluation and management are as follows:

1. FIFO: First in first out method of inventory evaluation assumes that inventory items are sold in the order in which they are manufactured or purchased. The oldest inventory is sold first. This is a widely used method as most companies sell products in the order in which they are purchased or manufactured. It represents the actual flow of goods in the business. Therefore the cost of goods sold will be lower and the ending inventory balance will be higher.
2. LIFO: Last in first out is the opposite of FIFO method the business will first sell the goods, which are manufactured or purchased last. Therefore, when the price of goods increase the cost of goods sold will be higher and the value of inventory balance will be lower.
3. HIFO: Highest in first out is the inventory evaluation method where the inventory with the highest purchase or manufacturing cost is sold or used first. This leads to the highest value of the cost of goods sold and the lowest ending inventory.
4. Average cost or weighted average cost: In weighted average cost inventory valuation method the inventory and cost of goods are calculated based on average purchase price or manufacturing cost. This is possible when there is not much variation in inventory.