Question

In periods of rising or decreasing costs, which inventory cost flow system results in neither the highest or lowest net income, but rather somewhere right in the middle?

Answer 1

In periods of rising or decreasing costs, the Weighted Average Cost Flow system results in neither the highest nor lowest net income but rather somewhere in the middle.

Step-by-step explanation

The Weighted Average Cost Flow system calculates the average cost of inventory items during a specific period, taking into account both the beginning inventory cost and the cost of new purchases. This method is particularly effective in mitigating the impact of extreme cost fluctuations. This balanced approach positions the Weighted Average method as a middle-ground choice, avoiding the extremes associated with other cost flow systems.

Furthermore, mathematically, the Weighted Average Cost per unit is calculated by dividing the total cost of goods available for sale by the total number of units available for sale. The formula is represented as follows:

`\[ \text{Weighted Average Cost per unit} = \frac{\text{Total Cost of Goods Available for Sale}}{\text{Total Number of Units Available for Sale}} \]`

This calculation ensures that the impact of both the beginning and new inventory costs is evenly distributed, leading to a more stable and moderate cost per unit. Consequently, this moderate cost per unit contributes to a net income figure that falls between the extremes associated with other cost flow methods during periods of fluctuating costs.