Page 81 - Budgeting for Managers

Book inventory Materi-als, parts, supplies, and goods on
hand at a given time according to records maintained for
routine business activities.
Physical inventory Materials, parts, supplies, and goods on hand at a
64 Budgeting for Managers
given time according to an actual count of the items.
Book value The dollar value of an item (such as an inventory item)
as recorded for accounting purposes.This may be different from the
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value of an item if it were sold, which is called the market value.
approaches to inventory, which we remember by their
acronyms: FIFO, LIFO, and JIT. Imagine a shelf where we stock
items. We’ll put one item in each spot on the shelf and then put
the next one in front of it.
• With first in, first out (FIFO), we have a shelf with two
sides. We put new items on the shelf from one side and
the people who need them take them off from the other
side. The first item we put in is the first one they take
out. FIFO is best for items that have a short shelf life,
because items on the shelf the longest go out first.
• In last in, first out (LIFO), the shelf has only one side.
We add items, pushing older ones back. When people
want to take items away, they take from the front of the
shelf, leaving older items in back.
• In just-in-time (JIT) delivery, the company tries to time
production so it produces and/or delivers items just as
they’re needed and to time delivery of materials and sup-
plies so it has what it needs just as it needs them.

The choice of FIFO, LIFO, or JIT matters, both for account-
ing of the dollar value of inventory and also for maintaining the
physical inventory for production. In accounting, the costs of
parts and labor change, and the book value of each item in
inventory depends on those costs. If we’re using FIFO, the old-
est items leave the physcial inventory and are sent to cus-
tomers first. As a result, all the items in inventory are made
more recently than if we were using LIFO. Therefore, the cost of

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