Final answer:
The Last-In, First-Out (LIFO) method of inventory accounting would produce the highest COGS in times of declining prices, as it sells the most recently acquired (and presumably more expensive in this scenario) items first.
Step-by-step explanation:
If prices had been declining instead of rising, the method that would have produced the highest cost of goods sold (COGS) would be the Last-In, First-Out (LIFO) inventory accounting method. Under LIFO, the most recently acquired items are assumed to be sold first; therefore, in times of declining prices, the cost of goods sold would reflect the higher costs of older inventory. This is opposed to the First-In, First-Out (FIFO) method, where the older, less expensive items would be sold first, resulting in a lower COGS.
The relevant concept here involves understanding the relationship between inventory valuation methods and changes in price levels. Given that a higher price means higher total revenue for every quantity sold, a firm with declining prices would want to maximize the recorded cost of goods sold to reduce taxable income, which is achieved with LIFO during periods of deflation. Conversely, in a situation where total costs are consistently higher than total revenues, the firm, aiming to be a profit-maximizing entity, would want to minimize losses by choosing the output where the differential between total revenues and total costs is the smallest.
In the broader economic context, changes in production technologies and scales, such as those provided by the assembly line or large department stores, impact the long-run average cost curve, leading to potential economies of scale over larger quantities of output.