President, Fenimore Manufacturing Company
Name, Accounting Advisor
Average Cost Method vs. Cost of Goods Sold and Inventory After researching the issue of which method of accounting for manufacturing cost variances is consistent with GAAP, my findings, ASC 330-10-30-12, Standard costs are acceptable if adjusted at reasonable intervals to reflect current conditions so that at the balance-sheet date standard costs reasonably approximate costs computed under one of the recognized bases. In such cases descriptive language shall be used which will express this relationship, as, for instance, "approximate costs determined on the first-in first-out basis," or, if it is desired to mention standard costs, "at standard costs, approximating average costs." The current policy of expensing all its manufacturing cost variances appears to be a violation of generally accepted accounting principles (GAAP). The cost of the ending inventory is based on budgeted standard costs not adjusted for the actual experience. I recommend changing from the average cost method to the first-in first-out method (FIFO).
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