Physical Flow versus Cost Flow Assumptions The Comfort Store sells heating oil,
ID: 2247716 • Letter: P
Question
Physical Flow versus Cost Flow Assumptions
The Comfort Store sells heating oil, coal, and kerosene fuel to residential customers. Heating oil is kept in large storage tanks that supply the company’s fleet of delivery trucks. Coal is kept in huge bins that are loaded and emptied from the top by giant scooping machines. Kerosene is sold “off the shelf” in five-gallon containers at the company’s retail outlet. Separate inventory records are maintained for each fuel type.
a.Which of the cost flow assumptions (average-cost, FIFO, or LIFO) best describes the physical flow of:
1.The heating oil inventory? Explain.
2.The coal inventory? Explain.
3.The kerosene inventory? Explain.
b.Which of these cost flow assumptions is likely to result in the lowest income tax liability for the company? Explain.
c.Explain why management keeps separate inventory records for its heating oil, coal, and kerosene inventories.
Explanation / Answer
Please see the below answers.
Answer:
a.1:
In case of heating oil which is obtained and stored into a barrel, that also puts together fully with the left over heating oil of that barrel from the preceding time of purchase.
Here the oil always is being sent to any company’s own barrel vehicles for delivery , so some additional cost will be summed with the total purchasing cost.
By considering this scenario , the average cost method is most effective method defining as best as physical flow of the heating oil inventory.
a.2:
In case of coal, the storage containers are stacked and rid of by using heavy machineries. Here, always the goods are kept on top as priority basis that the coal collected most currently is going to be sold first. So, it is proved to be analyzed that LIFO method is most effective out here to define the physical flow of coal inventory.
a.3:
In case of kerosene, the storage barrel s are filled up with multiple small volumed container. Here, the company possibly reel the stock at regular time frame, so FIFO method is most applicable to define as best to the physical flow of kerosene.
Answer:
b.
Among all these methods, LIFO is most effective and profitable as the lowest income tax liability from the managerial point of view. LIFO method signifies the very current stock of purchase price balanced with selling cost of that most recent stock.
So, in case of considering increasing price of stocked materials, LIFO is best for selling in terms of company’s business strategy with low income tax liability.
Answer:
c.
Here, management keeps separate inventory records for its heating oil, coal, kerosene inventories because each of these things are processed in different ways, also there purchasing cost varied according to the market trends, storing the stocks of three are fully based on different ways of approach, so selling price is also variable among the three, so that the company have to follow separate inventories for each of them due to there invariably trend wise fast changing market costs.