Local Drilling Inc. is a Canadian drilling-site company. All of the company's drilling material is purchased by the head office and stored at a local warehouse before being shipped to the drilling sites. The price of drilling material has been steadily decreasing over the past few years. The drilling material is sent to various sites upon request of the site manager, where it is stored and then used in drilling. When the material is sent, managers are charged the inventory cost based on the cost assigned to the item in the head office records. At any particular time, it is estimated that about one half of the company's drilling material inventory will be at the local warehouse. Part of each site manager's performance evaluation is based on the net income reported for the site.
Instructions
Answer the following questions by choosing among the specific identification, FIFO, and moving-average cost formulas and use of a perpetual inventory system.
(a) Which costing method would you, as a site manager, want to see used? Why?
(b) If FIFO were used, what could you, as a site manager, do that would help your performance evaluation when you request inventory? Why, and what might the implications be for the company as a whole?
(c) As the decision-maker at head office, which method would you recommend if you wanted the results to be fair for all site managers? Why?
(d) Which method would you recommend for determining the company\; taxable income? Why?
(e) Which method would you recommend for financial statement purposes? Why?