Advantages and disadvantages of weighted-average, Accounting Basics

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Q. Show Advantages and disadvantages of weighted-average?

Advantages and disadvantages of weighted-average when a company utilizes the weighted average method and prices are rising its cost of goods sold is below that obtained under LIFO but more than that obtained under FIFO. Inventory isn't as badly understated as under LIFO but it isn't as up-to-date as under FIFO. Weighted-average costing obtains a middle-of-the-road approach. A company is able to manipulate income under the weighted-average costing method by buying or failing to buy goods near year-end. Though the averaging process reduces the effects of buying or not buying.

The four inventory costing methods specific identification FIFO or LIFO and weighted-average involve assumptions about how costs flow through a business. In some example assumed cost flows may perhaps correspond with the actual physical flow of goods. For instance fresh meats and dairy products must flow in a FIFO manner to avoid spoilage losses. In contrast firms use coal stacked in a pile in a LIFO manner for the reason that the newest units purchased are unloaded on top of the pile and sold first.

Gasoline held in a tank is a good instance of an inventory that has an average physical flow. As the tank is refilled the new gasoline mixes up with the old. Therefore any amount used is a blend of the old gas with the new.

Although physical flows are occasionally cited as support for an inventory method accountants now recognize that an inventory method's assumed cost flows require not necessarily correspond with the actual physical flow of the goods. Actually good reasons exist for simply ignoring physical flows and choosing an inventory method based on other criteria.


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