PRESENTATION ON: INVENTORY VALUATION METHODS

PRESENTED TO: MS NIDHI WALIA PRESENTED BY: MANDEEP KAUR MBA-2 (2113)

FIRST IN FIRST OUT (FIFO)

Under this method, material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores. The units in the opening stock of materials are treated as if they are issued first, the units from the first purchase issued next, so on until the units left in the closing stock of materials are valued at the latest cost of purchases.

ADVANTAGES OF FIFO METHOD

It is simple to understand and easy to operate. This method covers the cost price of the materials. This method is useful when prices are falling. Closing stock of materials will be valued at the market price as the closing stock under this method would consist of recent purchase of materials.

DISADVANTAGES OF FIFO METHOD

This method increases the possibility of clerical errors, if consignments are received frequently at fluctuating prices as every time an issue of materials is made, the store ledger clerk will have to go through his record to ascertain the price to be charged.

LAST IN FIRST OUT (LIFO)

This method is also known as replacement cost method. Under this method last received materials are issued first & ending inventory consists of earlier acquired materials. In this last purchased goods will correspond to the current market prices except that goods were not purchased much earlier. The inventories will be valued at oldest lots on hand.

HIGHEST IN FIRST OUT(HIFO)

This method is based on the assumption that the closing stock of materials should always remain at the minimum value so the issues are priced at the highest value of the available consignments in the store. The method is not popular as it always undervalues the stock which amounts to creating a secret reserve. The method is mainly used in case of cost plus contracts or monopoly products as it is helpful in increasing the price of the contract or products.

ADVANTAGES

This method is suitable in rising prices because goods will be issued from the latest received lots at prices which are closely related to current market prices. The current cost will also be matched to current income.

DISADVANTAGES

This method is able to show lower profits because of increased charge to production & closing stock figures will also be low as they will be valued at earlier prices. The taxable liability will also be low thus enabling the concern to retain more money in the business.

AVERAGE COST METHOD

In this method of pricing all materials in stock are so mixed that a price based on all lots is formed. This cost may be of two types: Simple average cost Weighted average cost

SIMPLE AVERAGE COST

In this method the prices of all lots in stock are averaged & the materials are issued on that average price. WEIGHTED AVERAGE COST METHOD In this method the total cost of all the materials is divided by the total number of items in stock. The price calculated in this way will be used for issue of materials upto the time a fresh purchase has not been made.

After a fresh purchase, quantity will be added to the earlier balance quantity & material cost will be added to the earlier cost. A fresh price is calculated by dividing the changed total cost by the number of units in stock after the purchase . A new price is calculated where even a fresh purchase is made.

BASE STOCK METHOD

Under this method some quantity of materials is assumed to be necessary for keeping the concern going on. The quantity is not issued unless otherwise there is an emergency. This material which is not issued as it kept in stock is known as a base stock. The earlier materials received are kept as a base & are valued at a price on which they were acquired.

CONT..

Not an independent method. It is used along with some other methods such as FIFO, LIFO. After maintaining the base quantity in stock, the issues are priced at one of the methods mentioned above. The purpose of this method is too issue materials at current price.

STANDARD PRICE METHOD

The issue price of materials is predetermined or estimated in this method. The standard price is based on market conditions, usage rate, handling facilities, storage facilities. There will be a difference between the cost of materials & price charged to production. The difference between these two prices will be transferred to purchase price variance account.

MARKET PRICE METHOD