You are recently hired as a staff accountant for a small finished goods manufacturing company. Part of your duties include doing the month end inventory of finished goods. After a few months you do not look forward to this as the amount of inventory seems to be increasing. In order to satisfy your thoughts on this increase of inventory you decide to review the financial information for the last few months.

Looking over the Income Statement you see the profits have been steady, but the gross profit percentage has increased, and the cost of goods sold have decreased. This does not seem possible as the company has increased the amount of inventories.

Identify why this situation could exist, providing an explanation which can be given to the CFO.

In order to assist in controlling the costs and providing a lower inventory carrying cost, select a costing system and explain why it should be utilized.