Costing Comparisons
Costing Methods
During periods of rising prices, the LIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits. Since income taxes are based on profits, this is one of the reasons why the method is often used because the amount a business has to pay for income taxes will be less.
During periods of falling or declining prices, the FIFO Costing Method produces the lowest Ending Inventory Value thus resulting in the lowest reported profits.
The average costing method always produces results in the middle whether prices are increasing or declining.
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Costing Methods Video