Brandon’s Bentwood Furniture Company designs, makes, and sells custom furniture. The cost of the special resin used to finish the furniture has been increasing over the past 12 to 18 months. For example, a litre of the resin cost $10 in January 2015 and $17 per litre in March 2016. The cost is expected to continue increasing over the next 12 months. Each piece of furniture requires approximately five litres of resin and it represents one of the most expensive components. The company typically makes 50 unique furniture pieces a year. The company’s major investor informed Brandon that she requires annual financial statements that are prepared in accordance with generally accepted accounting principles. One of the outstanding items on Brandon’s “to-do” list is to select an appropriate cost formula and accounting policy for inventory. Brandon hopes to increase the company’s net profit over the next two years.
Required:
a. Recommend an appropriate cost formula and accounting policy for inventory.
b. Explain to Brandon and the major investor your reasons for the recommendation.
c. If the cost of resin is decreasing over the period, would you recommend a different cost formula? Explain your reasons.