Thread Co. is selecting its inventory system in preparation
for its first year of operations. Thread intends to use either the
periodic weighted-average method or the perpetual movingaverage
method, and to apply the lower of cost or market rule
either to individual items or to the total inventory. Inventory
prices are expected to generally increase throughout year 2, although
a few individual prices will decrease. What inventory
system should Thread select if it wants to maximize the inventory
carrying amount at December 31, year 2?

Inventory method

Cost or market application

(a) To maximize its inventory carrying amount at
December 31, year 2, Thread should use the perpetual movingaverage
method with the lower of cost or market rule applied to
the total inventory. First, when using the perpetual movingaverage
method, the cost of sales throughout the year are determined
using the average cost of purchases up to the time of the
sale. On the other hand, under the periodic weighted-average
method, the cost of each item is the weighted-average of all units
purchased during the year. During a period of rising prices, the
perpetual moving-average method results in a lower cost of goods
sold and a higher ending inventory because the cost of items sold
throughout the year is the average of the earlier, lower prices. Second,
the application of the lower of cost or market rule to the total
inventory will result in a higher ending inventory because market
values lower than cost are offset against market values higher than
cost.