Discussion 1: The Video Summary — There Are Three Primary

Discussion 1per The Video Summary There Are Three 3 Primary Invento

Per the video summary, there are three (3) primary inventory costing methods used by companies: LIFO, FIFO, and Weighted Average. With each method comes a number of pros and cons that a company must consider when implementing its inventory management strategy. Select a company below and discuss the advantages associated with its chosen inventory costing method.

Target - Uses LIFO

Amazon - Uses FIFO

FedEx - Uses Weighted Average

Sample Paper For Above instruction

Inventory management is a crucial component of a company’s operational efficiency and financial accuracy. Among the primary methods used to account for inventory costs are LIFO (Last In, First Out), FIFO (First In, First Out), and the Weighted Average method. Each method offers specific advantages tailored to different business objectives, accounting practices, and economic circumstances. This paper explores the advantages of FedEx’s choice to use the Weighted Average inventory costing method, highlighting its relevance to FedEx’s operational needs and financial strategies.

FedEx, a global logistics and courier company, employs the Weighted Average method to manage its inventory of spare parts, supplies, and fuel. This choice offers several operational and financial advantages that align with FedEx’s business model of maintaining a dynamic inventory that supports its aircraft fleets and logistical operations. The Weighted Average method calculates an average cost for all units available for sale during a period, providing a simplified approach to inventory valuation and cost computation (Garrison, Noreen, & Brewer, 2021).

One significant benefit of the Weighted Average method for FedEx is its simplicity and ease of maintenance. Unlike LIFO or FIFO, which require tracking the specific order of inventory purchase or consumption, the weighted approach aggregates costs over a period, reducing administrative burden and minimizing record-keeping complexities. This streamlined process leads to cost savings in accounting and reduces the potential for errors that can distort financial statements (Berk, DeMarzo, & Harford, 2019).

Another advantage is the stability it provides in financial reporting. During periods of fluctuating fuel prices and inventory costs, the Weighted Average method smooths out cost variations. Consequently, it results in less volatile gross margins and net income figures, which are valuable for both internal decision-making and external reporting. For a logistics operator like FedEx, stability in financial statements can enhance investor confidence and facilitate better strategic planning (Higgins, 2020).

Moreover, the Weighted Average method aligns well with FedEx’s operational dynamics, where inventory turnover is high, but the specific identification of individual spare parts is often unnecessary. Since many spare parts and supplies are interchangeable, using an average cost makes logical sense for valuing inventory stock. This approach allows FedEx to accurately allocate costs in a manner that reflects overall inventory expenses without the need for complex tracking (Ross, Westerfield, Jaffe, & Jordan, 2021).

Furthermore, the use of the Weighted Average method can influence tax strategies and cash flow management positively. By providing a consistent and predictable cost basis, it simplifies tax calculations and can aid in managing inventory-related tax liabilities effectively. Additionally, during periods of rising costs, the average cost method can result in higher COGS (Cost of Goods Sold), potentially reducing taxable income and providing cash flow benefits (Warren, Reeve, & Fess, 2020).

Despite its advantages, it is essential to understand that the Weighted Average method might not be suitable for all business contexts, especially where specific inventory valuation is critical for pricing or margin analysis. However, for a distribution and logistics powerhouse like FedEx, where efficiency and stability are paramount, this approach offers a pragmatic and financially advantageous solution.

References

  • Berk, J., DeMarzo, P., & Harford, J. (2019). Financial Reporting and Analysis. Pearson.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial Accounting. McGraw-Hill Education.
  • Higgins, R. C. (2020). Analysis for Financial Management. McGraw-Hill Education.
  • Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. D. (2021). Corporate Finance. McGraw-Hill Education.
  • Warren, C. S., Reeve, J. M., & Fess, P. E. (2020). Financial & Managerial Accounting. Cengage Learning.

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