Cost accounting techniques — ACCA Practice Question 15

How to approach this question

Think about which costs are expensed under FIFO (the oldest, cheapest ones) versus AVCO (a blend). Lower expenses mean higher profit. The remaining inventory under FIFO is the newest, most expensive stock.

Full Answer

B.Reported profit will be higher, and closing inventory will be higher.✓ Correct

During inflation, FIFO matches older, lower costs against current revenues, resulting in a lower Cost of Sales and higher gross profit compared to AVCO. Closing inventory consists of the most recent, higher-priced purchases, so its value is higher than under AVCO.

Common mistakes

Confusing the effects of FIFO with LIFO (which is not permitted under IAS 2 but often tested conceptually).

In a period of consistently rising commodity prices, a company is considering switching its inventory valuation method from AVCO (Average Cost) to FIFO (First-In, First-Out).

What will be the impact on reported profit and closing inventory valuation?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA MA — Management Accounting Practice Exam 2

More questions from this exam

In a period of consistently rising commodity prices, a company is considering switching its inventory valuation method from AVCO (Average Cost) to FIFO (First-In, First-Out). What will be the impact on reported profit and closing inventory valuation?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA MA — Management Accounting Practice Exam 2

More questions from this exam

In a period of consistently rising commodity prices, a company is considering switching its inventory valuation method from AVCO (Average Cost) to FIFO (First-In, First-Out).

What will be the impact on reported profit and closing inventory valuation?