Answer to Question #246385 in Economics for muskan

Question

Three partners choose to go the start-up way. They run a chain of Pet Spa across Mumbai and Pune. For the accounting year 2022, their business observes increasing prices for materials. Hence, while preparing their financial statements, the three partners had varying objectives behind the method they should adopt for pricing the materials.

Objective I: The partners wished to hypothecate inventory and take a loan. Hence, a higher pricing of ending inventory in the business’ balance sheet would be desirable.

Objective II: The partners would wish to attract lower taxes on the business’ profit and hence a lower profit before tax would be desirable.

Discuss in brief any five material pricing methods that businesses may adopt. Identify the pricing methods that would achieve objectives I and II.

Answer 1

The pricing methods, which are commonly used are:

1. “First-in-First Out” Method

2. “Last-in-First-Out” Method

3. Average Price Method

4. Fixed Price Method

5. Actual Cost Method.

FIFO moves the first/oldest costs from inventory and reports them as the cost of goods sold and leaves the last/more recent costs in inventory, so it would better achieve objective I.

LIFO moves the latest/more recent costs from inventory and reports them as the cost of goods sold and leaves the first/oldest costs in inventory and would better achieve the objective II.