Management and Cost Accounting WoolWorths

Question: Discuss about the Management and Cost Accounting : WoolWorths. Answer: a. The selected company for this task is Woolworths. The inventories are valued at one of the values from the below mentioned values whichever is lower (Woolworths, 2016). Actual Cost Net Realisable Value With regards to determination of cost, the method deployed by the company is weighted average basis as is mentioned in the relevant accounting policy from the annual report of the company. Also, the company deploys the perpetual inventory system as the sale of the various items is updated in the inventory on a continuous basis (Woolworths, 2016). The cost assumption has a critical impact on the profit and loss account. This is because the overall COGS (Cost of goods sold) depends on the inventory cost assumption (Drury, 2008). In the weighted average basis method, consideration is given to all the goods that form the inventory during the given period and their average price is worked out. As a result, in case of a situation where the inventory is getting expensive, this would lie between LIFO (Last in First Out) and FIFO(First in First out). In a business environment where inventory is getting expensive, LIFO would tend to overestimate the cost of goods sold as the used inventory would be the expensive ones and hence the profit would be underestimated. In this case, the valuation of inventory would be lower as they would be measured at cost as per the companys accounting policy. However, in the event of usage of FIFO, the cost of goods sold would be underestimated as the goods purchased initially would have been used while the food purchased at the end would remain pending in the form of closing inventory as the year end. In such case, the COGS would be less and hence profit would be inflated. Further, the cost of closing inventory at the end of the financial year would be high (Seal, Garrison Noreen, 2012). The weighted average of inventory tends to lie between the LIFO and FIFO methods as the COGS would be greater than FIFO but less than LIFO. Similarly, in terms of profits, the corresponding values using weighted average would be greater than LIFO but less than FIFO. In regards to ending inventory valuation, as the realisable value of the inventory in this case would be higher than the average cost, hence valuation of ending inventory would take place only at the average cost of inventory which is computed initially (Bhimani et. al., 2008). Since the company has a multitude of inventories, hence while valuation of the inventory, the company does not limit to just one method and for each inventory tends to evaluate the lower out of the cost and the net realisable value (Seal, Garrison Noreen, 2012). For instance, in FY2016, the total inventory as on June 30, 2016 is $ 4,558.5 million but out of this $ 447.8 has been valued at net realisable value while the remaining valuation of inventory has been carried out at cost (Woolworths, 2016). The low inventory being valued at the net realisable value is indicative of the low obsolescence suffered by the inventory which is expected in the given sector (Drury, 2008). References Bhimani, A, Horngren, CT, Datar, SM Foster, G 2008, Management and Cost Accounting 4th eds., Prentice Hall/Financial Times, Harlow Drury, C 2008, Management and Cost Accounting, 7th eds., Thomson Learning, London Woolworths 2016, Annual Report 2016, Woolworths Website, Available online from https://nerdyturtlez.com/tutor/order.php?id=199501 (Accessed on September 30, 2016) Seal, WB, Garrison, RH Noreen, EW 2012, Management Accounting, 4th eds., McGraw -Hill Higher Education, Maidenhead