APICS Certified in Production and Inventory Management (CPIM) — Question 8

Which of the following methods of evaluating inventory most overstates the asset value when prices are falling?

Answer options

• A. First in, first out (FIFO)
• B. Last in, first out (LIFO)
• C. Average cost
• D. Standard cost

Correct answer: A

Explanation

First in, first out (FIFO) assumes that the oldest inventory items are sold first, which means that in a falling price environment, the remaining inventory is valued at higher historical costs. In contrast, Last in, first out (LIFO) would reflect lower costs in such a scenario, while Average cost and Standard cost methods do not specifically overstate asset value in declining price situations.