inventory is shipped out in the order it was received. Division managers have some latitude about how they dispose of inventory (promotional activities, for example, can be used to boost sales), but they are not able to change the inventory valuation method independently because of the wide reaching effect such a change would have on the company's financial standing as a whole.
GST uses the FIFO method of stock valuation based on the fact that this method is recognized throughout the world as being an accepted way of accounting for the value of stock, and based on the company's desire to use a cost accounting method. The FIFO method is based on the idea that the first units received are the first units sold; this leads to the calculation of a cost of goods sold that is based on the units first received.
GST uses the cost of goods sold (as do all businesses) as the basis for their profitability calculations. Gross profit is the residual when the cost of goods sold is subtracted from the selling price. Because of the importance of the gross profit figure in business (for internal and external purposes), the cost of goods sold component is also a critical factor. If the cost of goods sold is relatively high, the gross profit will be commensurably low; if the cost of goods sold is low, the gross profit will be commensurably high. Since one of the key components of cost of goods sold, stock valuation, is not clearly defined, it can be easily manipulated to yield a profit figure which meets the goals of the organization at any particular time.
The managers at GST take a short-term view of their company with regard to stock valuation. Rather than considering how much it would cost to replace stock that is sold or used in the manufacturing process, the company instead considers what it took to produce the revenue that is coming into the company. From this standpoint, GST is interested in learning how much profit it is able to...