Q. Parents gross profit margin would be highest if it accounts for subsidiary’s inventory using 1. FIFO and temporal method 2. wighted avg cost and temporal 3. weighted avg cost and all current To answer assume that subsidiary’s currency is depreciating relative to parent’s currency Please explain your answer
I chose 3. Under the FIFO situation, you would be expensing the older, more expensive goods first since the currency is depreciating.
jeez 2 and 3 seem right to me
You are looking at the problem in the text book. Please note there is an erratum posted. And that Choice A: is FIFO and Temporal. Choice C: is FIFO and Current Rate method. Sales = Average rate irrespective of method used. FIFO and Temporal method: COGS will be based on the oldest pieces in Inventory -> so their cost would be higher. FIFO and Current Rate: In the Current rate method FIFO and LIFO have no meaning. So all COGS is average rate. Since the LC is depreciating - old Historic COGS > Average rate for COGS. So COGS Current rate will be least value -> and hence the Gross Margin will be the highest value.
Just trying to understand from your answer Gross profit margin = ( Sales - (COGS & SGA )) / Sales Under FIFO the COGS would be for old inventory, which would be more when translated as the currency is depreciating. Under wighted avg cost the COGS would be relatively less compared to that under FIFO and hence wighted avg cost is preferred over FIFO to enhance gross profit margin Am I correct ?
sidd Wrote: ------------------------------------------------------- > Just trying to understand from your answer > > Gross profit margin = ( Sales - (COGS & SGA )) / > Sales > > Under FIFO the COGS would be for old inventory, > which would be more when translated as the > currency is depreciating. > > Under wighted avg cost the COGS would be > relatively less compared to that under FIFO and > hence wighted avg cost is preferred over FIFO to > enhance gross profit margin > Gross profit margin = Sales - COGS / Sales > Am I correct ?
cpk123 Wrote: ------------------------------------------------------- > You are looking at the problem in the text book. > Please note there is an erratum posted. > And that > Choice A: is FIFO and Temporal. > Choice C: is FIFO and Current Rate method. > > Sales = Average rate irrespective of method used. > > > FIFO and Temporal method: COGS will be based on > the oldest pieces in Inventory -> so their cost > would be higher. > > FIFO and Current Rate: In the Current rate method > FIFO and LIFO have no meaning. So all COGS is > average rate. Since the LC is depreciating - old > Historic COGS > Average rate for COGS. So COGS > Current rate will be least value -> and hence the > Gross Margin will be the highest value. How is choice B different than choice C? There’s a difference between average rate (cogs under current method) and weighted average rate (weighted average inventory under temporal)?
Please refer to the text book - there is an erratum on this very question.
Thanks for clearing that CP