Tesseralik Inc. (Tesseralik) is a small private manufacturing company that makes inexpensive laptop computers. Tesseralik is owned by three brothers who converted their interest in computers into a business. All three brothers are involved in the management of the company. The company is relatively free of debt, with only a small bank loan that is personally guaranteed by the brothers. Tesseralik purchases all component parts from independent manufacturers and assembles them into the laptops.

The company has been successful because it has been able to provide a good-quality product at a low price. Management searches extensively to find the lowest-cost components that meet its quality standards. Tesseralik employs 14 people, mainly assemblers who put together the computers. The major costs incurred are the cost of labour and parts for the computers. There is, as well, a significant amount of both fixed and variable overhead incurred by the business. While the company has been successful, it’s often short of cash.

Required:

Prepare a report to Tesseralik’s management recommending accounting policies for inventory. Your report should fully explain your recommendations.