To Calculate the Unit Cost of the Neoprene Stockingfoot Waders

question 166

Essay

To calculate the unit cost of the Neoprene stockingfoot waders he sells, Gary Guinn added up all his costs and divided by the number of waders he sold during the year. He then used this unit cost to estimate total costs for the coming year. Explain why Gary’s method is not useful in predicting total costs for the coming year.

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Definitions:

FIFO Process Cost Method

A method of inventory costing that assumes the first units produced or purchased are the first ones used or sold, standing for "First-In, First-Out."

Finished Goods

Products that have completed the manufacturing process and are ready to be sold to customers.

Work In Process

Partially finished goods that are in various stages of production in a manufacturing company's inventory.

Direct Materials

Raw materials that are directly traceable and contribute to the finished product in a manufacturing process.