Suppose that your company has always used FIFO and that prices have been rising over the years. In order to increase efficiency, you have recommended that the company change its manufacturing process and adopt a just-in-time process, in which the raw materials are purchased just in time for production and goods are produced just in time for sale. The new system will either eliminate or significantly reduce inventory levels.
Required:
a. As you reduce inventory levels during the change to the new policy, what effect will this have on your financial statements?
b. What might be the financial tradeoffs that you should consider in changing your manufacturing process to a just-in-time basis?
c. For a company with just-in-time inventory, what is the impact of the choice of a FIFO or moving average cost flow assumption?