Deere and Company Case

a. Some risk associated with holding inventory are that the cost of the inventory until it is

sold (money tied up in inventory could be used in other areas), cost to store inventory,

and the inventory could lose its value if stored to long (degradation, no longer in

demand). Some benefits associated with holding high inventory are quantity discounts

and reduction in lead time to quickly meet customer demand.

b. The cost in raw materials will be direct materials and indirect materials not yet needed in

work in process. The cost in WIP will be direct materials needed for production, direct

labor, indirect labor, indirect materials needed and overhead. These cost that create the

product become the cost of goods manufactured. The cost of goods manufactured is the

cost I expect to be in the finished goods inventory.

c. Cost flow assumptions are necessary because of inflation and the changing costs

companies’ experience. If costs were stable it wouldn’t matter how costs were flowed.

Inventory cost flow assumptions are necessary to determine the cost of goods sold and

ending inventory. Companies make certain assumptions about which goods are sold and

which remain in inventory creating different accounting methodologies. Only

requirement regardless of method used is that total cost of goods sold plus the cost of

goods remaining in the ending inventory for financial and tax purposes are equal to the

actual cost of goods available.

FIFO, LIFO, and weighted average are come methods used to account for inventory.

FIFO assigns first costs incurred to COGS on income statement. LIFO assigns last costs

incurred to COGS on the income statement and if using a weighted average method a

company would assign average cost incurred to COGS on income statement.

Deere and Company uses LIFO costing method.

d.

Assuming that prices are increasing, FIFO gives a better indication of the value of ending

inventory (on the balance sheet), but it also increases net income...