What is the effect of inventory total on net income

Question

The company I work for has decided to update the costs we use to calculate our inventory totals after about 10 years. We did a test run today and found that the new figures resulted in a value about $125,000 less than the old figures, mainly due to an increase in manufacturing efficiency. Being that inventory is a component of cost of goods sold, wouldn't a lower inventory total yield a lower COGS, which in turn would yield a higher gross profit? My boss made it sound like the lower inventory total was a bad thing and it has me confused.

Answer 1

COGS = Beginning inventory + Purchases - Ending inventory

So if your ending inventory is lowered, COGS will increase, and profit will decrease.

Answer 2

inventory is an asset and reduces the total assets on the balance sheet which is why its bad.  of course lowering cog is good.

Answer 3

It seems you are asking a different question than COGS vs profits.  Is your company changing changes the flow process from FIFO to LIFO or Average cost?  

More likely: Based on what you said you have not sold any inventory which would have no affect on COGS at the moment. I think your company is marking inventory to "lower cost" or "market" which in this case is less than your previous inventory valuation.  If this it true your boss is propably looking at the accrued loss that must be taken to reflect the now lower value of the inventory your company has.