Unit 2 SAC 1
Explain what is meant by 'First-In, First-Out' – answer FIFO is a cost assignment
method which assumes that the first inventory purchased is the first inventory sold.
Therefore it values inventory sold using the earliest cost on hand.
Explain what is meant by 'Identified Cost' - answer Identified Cost is a method of valuing
inventory by physically marking each item in some way at the time of purchase so that
its individual cost price can be identified.
Explain why the FIFO assumption is needed - answer Because often it is:
- Impossible (eg. petrol)
- Impractial (eg. lollies)
- Not worth the time effort and cost to mark each item of inventory with its cost price
If each item of inventory looks identical and the business does not mark the inventory to
indicate its cost, businesses can cannot know the exact cost price of a specific item that
is sold. Therefore the business has to assume that the inventory bought first, is sold
first.
Explain the advantages of FIFO compared to Identified Cost - answer1. It can be used
for all types of inventory
It is not always possible, practical, or cost effective to mark each item of inventory with
its cost.
In these cases, Identified Cost cannot be used but FIFO can because it does not require
individual items of inventory to be marked or labelled.
Identified Cost cannot be used for inventory that cannot be individual labelled (such as
petrol)
2. It costs less to administer than Identified Cost
The costs involved in labelling items with their cost include the cost of stickers or labels
as well as the wages of the employees who need to label every item and record each
code and corresponding cost price when inventory is purchased. It also costs in terms
of the time employees are not dedicating to other tasks.
FIFO does not require this investment of time which means lower wages and stationary
costs.
Explain the advantages of Identified Cost compared to FIFO - answer1. It complies with
Faithful Representation
Identified Cost labels each item of inventory with the specific cost price of that item, so
that the specific cost price can be recorded when that item of inventory is sold.
Explain what is meant by 'First-In, First-Out' – answer FIFO is a cost assignment
method which assumes that the first inventory purchased is the first inventory sold.
Therefore it values inventory sold using the earliest cost on hand.
Explain what is meant by 'Identified Cost' - answer Identified Cost is a method of valuing
inventory by physically marking each item in some way at the time of purchase so that
its individual cost price can be identified.
Explain why the FIFO assumption is needed - answer Because often it is:
- Impossible (eg. petrol)
- Impractial (eg. lollies)
- Not worth the time effort and cost to mark each item of inventory with its cost price
If each item of inventory looks identical and the business does not mark the inventory to
indicate its cost, businesses can cannot know the exact cost price of a specific item that
is sold. Therefore the business has to assume that the inventory bought first, is sold
first.
Explain the advantages of FIFO compared to Identified Cost - answer1. It can be used
for all types of inventory
It is not always possible, practical, or cost effective to mark each item of inventory with
its cost.
In these cases, Identified Cost cannot be used but FIFO can because it does not require
individual items of inventory to be marked or labelled.
Identified Cost cannot be used for inventory that cannot be individual labelled (such as
petrol)
2. It costs less to administer than Identified Cost
The costs involved in labelling items with their cost include the cost of stickers or labels
as well as the wages of the employees who need to label every item and record each
code and corresponding cost price when inventory is purchased. It also costs in terms
of the time employees are not dedicating to other tasks.
FIFO does not require this investment of time which means lower wages and stationary
costs.
Explain the advantages of Identified Cost compared to FIFO - answer1. It complies with
Faithful Representation
Identified Cost labels each item of inventory with the specific cost price of that item, so
that the specific cost price can be recorded when that item of inventory is sold.
