Advantages And Disadvantages Of Inventory Management
Inventory Management is a daunting task for any business. However, it is one of the main functions of business and accounting. Inventory tracking ensures that business is in profit if tracked accurately and timely over a period of time. The three main types of inventory cost flow methods that AFC needs to look into are weighted average method, FIFO method and LIFO method.
1. Weighted Average Inventory cost flow Method
Advantages
a. During wide fluctuations in pricing, this method gives most satisfactory results
b. Due to average pricing, comparison between profits of different periods become easier and realistic
c. This method values identical products at same cost even though they are purchased at different rates at different intervals
Disadvantages
a. Inventory cost valuations may not bear any kind of relationship with the price that is actually paid to the suppliers
b. Company can manipulate its income under weighted average method by buying more or less of supplies at the end of accounting year
2. FIFO (First in First Out) Inventory cost flow Method
Advantages
a. It helps in maintaining inventory records in natural way by recording all purchases and supplies in the order of receipt
b. This method is best suited for fast turnaround items and shows more realistic pricing
c. It is a good reflection of market price trend over a period of time
d. Records each batch of raw material with respective cost and hence facilitate better accounting of old and new inventories held and/
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