Learning Activity 4.4: Inventory Valuation
Introduction and Purpose of Assignment
Companies have the ability to make decisions about the way costs are handled and reported. It is important to understand the way the business operates and the impact of these reporting decisions on financial information. This discussion evaluates the impact of the various types of costing approaches on inventory value – and the resulting impact on related financial information.
Objectives
· Evaluate the effect of inventory on financial information. (4.3)
Theory and Context
For Work-In-Process and Finished Goods Inventories companies can choose to value inventories in a variety of ways:
· Absorption Costing: product costs are capitalized & period costs are expensed.
· Variable Costing: variable product and period costs are capitalized. Fixed product and period costs are expensed.
· Throughput Costing: only direct materials are capitalized.
Absorption costing is the method that companies need to use to reflect the value of the inventory asset on the balance sheet. The other methods may be beneficial to the company internally to help evaluate the costs of production. In relationship to the type of accounting, absorption costing is required for financial accounting, but variable or throughput costing may be more beneficial for management decisions and used as part of a company’s managerial accounting information.
Resources
Levi Strauss & Co XXXXXXXXXXGrowing with purpose. 2016 annual report. Retrieved from http:
levistrauss.com/wp-content/uploads/2014/01/Levi-Strauss-Annual-Report XXXXXXXXXXpdf
Simplestudies. (2010, April 19). What are absorption, variable, and throughput costing approaches? Retrieved from http:
simplestudies.com/absorption-variable-throughput-costing.html
Instructions
1. Review Inventory Valuation in the Levi Strauss 2016 Annual Report.
a. Estimate how the inventory value would change under each approach, and discuss the impact of the different results.
. Discuss which approach would be the most beneficial to the company.