Final answer:
A firm may change its cost flow assumption, but this could impact financial statements and necessitate explanation. Technological advances can affect a firm's costs and their cost flow assumption choice. Emphasis should be on variable costs in financial decision-making over sunk costs.
Step-by-step explanation:
Yes, a firm can change the cost flow assumption it uses from period to period; however, such changes can affect the financial statements and may require justification to auditors or regulatory bodies. Cost flow assumptions include First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and the Weighted Average method, which are used to determine the cost of goods sold and ending inventory. It's important to note that frequent changes in the cost flow assumption may call into question the comparability of financial statements over time and may require additional disclosure.New developments in production technology can shift the long-run average cost curve, affecting a firm's costs and potentially its choice of cost flow assumption.
The choice of cost flow assumption can influence reported profit, tax liabilities, and the firm's strategy for managing inventory costs.In decision-making, firms ought to prioritize current and future variable costs, which are controllable, over sunk costs, which are historical outlays that cannot be recovered. Focusing on variable costs can provide insight into the firm's capacity for cost reduction and the impact of production volume changes on costs.