HEALTHCARE FINANCE

CASE STUDY #2

SLO 5: Understand the methods of valuing inventory

The Insertion Clinic specializes in quick orthopedic repairs of knees vis knee replacement surgery. The knee replacement inserts are very expensive, so the clinic has good inventory control and takes a physical inventory at year-end to establish the ending inventory quantity.

Inventory activity spanning fiscal year 20XX for Type 112 Knee Inserts, which are billed at $10,000 each, is depicted in the following table:

Description	Unit	Unit Cost	Total Cost
Beginning Inventory (January 1)	10	$2,000	$20,000
March 1: Purchase #1	18	$2,200	$39,600
June 15: Purchase #2	8	$2,600	$20,000
October 7: Purchase #3	12	$2,900	$34,000
Total on hand	48	--	$115,200
Inventory used (Sold)	28	--	--
Ending Inventory	20	--	--

Suzanne Summer, office manager, knows that account choices can affect net income. She knows you studied health care finance and turns to you to help her value the inventory and find the best method that produces the highest profit.

Explain to Suzanne why you would not consider using the specific identification costing method to value the inventory at the clinic.

Compute the cost of inventory used (sold) via weighted average costing

Compute the cost of inventory used (sold) via FIFO costing

Compute the cost of inventory used (sold) via LIFO costing

Which method produces the highest profit? Why? Does this method always produced the highest profit?

Explain to Suzanne that if she chooses the method above there are trade-offs. What are the trade-offs to using this method?

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