Inventory cost flow assumptions can be used to assign dollar amounts to ending inventory and cost of goods sold. As per inventory cost flow assumption, an inventory item's cost varies depending on when it is built or purchased and when it is sold.
Management requires formal mechanism for allocating expenses to inventory as they develop into sellable commodities due to this cost disparity. The cost flow hypothesis may or may not correspond to actual flow of products. Instead, cost flow estimate that differs from real usage is acceptable. Businesses typically choose cost flow assumption that either reduces or maximizes earnings.
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