11110memo1 - Memorandum To CM 2 Management Team From Leah...

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Unformatted text preview: Memorandum To: CM 2 Management Team From: Leah Celani, Accountant Date: November 1, 2010 Subject: Cost flow assumptions Because there is no requirement that the cost flow assumption adopted be consistent with the physical movement of goods, there are several different cost flow assumption methods that your company may choose to follow. Specific identification requires identifying each specific item sold and each specific item in inventory, thus matching actual costs with actual revenue. This method seems optimal, but it is also very expensive and almost impossible to achieve. Specific identification is often only used by smaller companies with small inventories. The average cost method prices items in the inventory on the basis of the average cost of all similar goods available during the period. Most companies use the average cost methods because it’s simple to apply and objective. The FIFO method assumes that the first goods purchased are the first goods used or sold. This allows the inventory to represent the most recent goods purchased are the first goods used or sold....
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