Evaluating Inventory in the Face of Rising Prices

An important part of the manufacturing business is managing costs. This can be done in a variety of ways, but tracking inventory is an important aspect. Those who deal with cotton gin parts in Lubbock, TX often have to consider rising prices as they place value on their inventory.

How this is done greatly affects costs, revenue and taxes. When prices are on the rise, consider the following methods of evaluating inventory. A quick consultation with your accountant can help you determine which method is best for your business.

LIFO

Last-in, first-out, abbreviated LIFO, is a common costing method. As the name implies, this system uses the most recent costs first. This is advantageous when prices are going up, since it provides the highest cost of product sold. It also generates the lowest taxable income.

FIFO

First-in, first-out, abbreviated FIFO, works in the opposite fashion as LIFO. Using this system, you will apply the earliest costs first. When used in a rising-cost market, this method will produce the highest taxable income and the lowest total for goods sold.

Periodic Inventory

If you are evaluating inventory in a market with rising prices, you’ll probably choose LIFO. Under the LIFO system, you can use the periodic inventory system, also known as a book system. With this system, your inventory is valued at designated intervals. The results are then combined.

Perpetual Inventory

Another option under the LIFO system is perpetual inventory. Using this system, you calculate the cost at the time of individual sales rather than wait for designated time intervals. This often generates a lower taxable income which results in tax savings for the year.

Choosing a Method

Are your prices always increasing? If so, LIFO is typically a good choice for your inventory calculations. This can apply to both retail and manufacturing situations. However, if the raw materials you use for production fluctuate in price, LIFO might not always be the best option. If you’re dealing with cotton gin parts in Lubbock, TX and related products, it’s good to check with local dealers to determine typical pricing patterns to guide your decision.

Changing Methods

Once you choose a method for evaluating your inventory, it’s important to remain consistent. This will keep your books organized and accounts accurate. It’s also a requirement of the IRS. This organization expects your reporting to be consistent. If you decide to change methods, you may be required to ask for approval from the IRS by filing the appropriate forms.

Get More Tips

Since 1943, the team at M.B. McKee Company, Inc. has been serving our local community of Lubbock. Locally owned and family operated, we provide great customer service and solutions for ongoing issues. With over 70 years of experience, our products, services and engineering will always exceed your expectations. We are your go-to source in the parts and bearings industry. Contact our experts today with any questions about cotton gin parts in Lubbock, TX or other related machinery and products. We would be happy to assist you!

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