TOPIC

: I N V E N T O RY
VA L U AT I O N
 When store department issued
material to production department,
the issues must be valued or priced
because it will affect the cost of the
products produced by the
STOCK production.
VA L U AT I O N &
PRICING ISSUES
The basic problem in valuing
material issues to production
department is to decide which price
to be used.
 S TO C K VA L U AT I O N

Objectives of valuing material issues:

To enable the store control

department to charge to
To charge a realistic amount
production by using a
for materials consumed and
consistent and reasonable
simple method of valuing
value of stock on hand.
stock
S T O C K VA L U I N G M E T H O D S

FIRST IN LAST IN WEIGHTE

FIRST FIRST D
OUT OUT AVERAGE
(FIFO) (LIFO) METHOD
 FIRST IN FIRST OUT
(FIFO)

 The earliest materials purchased are used first until exhausted.

 Materials are issued in chronological order.

 Price of the first batch received will be used for all issues until all units from this
batch have been used before price of the next batch receive become the issue price to
production.

 FIFO ensures materials are issued at actual cost.

 The older items are the first to leave and the closing stock will represent the most
recent purchases.

 Under FIFO method closing stock valuation is higher because its consist of material
which is recently purchased at higher cost.
 LAST IN FIRST OUT
(LIFO)

 The latest materials received are used first or issues first.

 Price of the last batch received will be used first for all issues
until all units have been issued before price of the next last
batch receive become the issue price.

 LIFO is just a recording exercise for determining cost of

issues it doesn’t affect the physical flow of material to
production.

 Materials are issued at prices that are closer to the current

price levels.
 W E I G H T E D AV E R A G E M E T H O D

 The average price used.

 The price is calculated by dividing the total cost of materials in the stock from which the
material to be priced could be drawn, by the total quantity of materials in that stock.- CIMA
 A new issue price has to be calculated each time new materials are received and not at the time
when there is a new issue.
 This method evens out any fluctuations in the purchase price.
 The price paid for the material may not be used because the average price is used.
T H R E E M E T H O D S T O VA L U E T H E
STOCK

First-In-First-Out Last-In-First-Out Weighted Average

(FIFO) (LIFO) Method (WAM)
• Material issued are • Material issued are • Perpetual weighted
priced at the price charged out at the average system
of the earliest batch price of the most where the issued
in stock until all recent batch price is
units of the batch received and recalculated after
have been issued. continue to be each receipt taking
charged until a new into account both
batch is received. quantities and
money value.
FIRST IN FIRST OUT (FIFO)
Advantages Disadvantages
Avoid obsolescence- as materials that are Cost of production does not reflect current
received first are issued first. market prices in times of rising prices- in
periods of rising prices (inflation); as
materials are charged to production at the old
prices, the cost of production may lag behind
the current economic values.
Logical method- it takes into No comparison with similar job- this
consideration the normal procedure of method does not premit comparison of the
utilizing first those materials, which are costs of similar jobs or cost units because
receive first. similar jobs, simultaneously, started may be
charged materials at different prices.
Proper closing stock valuation-
valuation of closing stock is at cost as
well as at the latest price paid. So, closing
stock valuation reflects the latest market
price.
LAST IN FIRST OUT (LIFO)
Advantages Disadvantages
Prices reflect current market prices- Unrealistic method- this method is not
materials are charged to production at the realistic as it does not conform to the
latest prices paid. Thus, effect of current physical flow of materials.
market prices of materials is reflected in
the cost of sales, provided the materials are
recently purchased.
Valuation of closing stock- the closing
stock is valued at the old prices and does
not represent the current economic values.
W E I G H T E D AV E R A G E M E T H O D ( WA M )

Advantages Disadvantages
Best method even when prices New calculation with every receipt- a
fluctuate- is considered to the best fresh rate calculation has to be made as
method when prices fluctuate, soon as a new lot of materials is
considerably, because this method tends to purchased which may involve tedious
smooth out fluctuation prices. calculations. Thus, there are chances of
clerical errors.
Simple calculation- issue prices are not to
be calculated each time issues are made.
I L L U S T R AT I O N
Betty Manufacturing Co. Ltd makes the following
purchases of material Y in the month of January 2010

Purchases Issues
100kg at RM1.00 per
1/1/2010 10/1/2010 80 kg
kg
100kg at RM1.50 per
5/1/2010 20/1/2010 50kg
kg
130kg at RM2.30 per
15/1/2010 30/1/2010 100 kg
kg
 STORE LEDGER ACCOUNT – FIFO METHOD
DATE PURCHASES ISSUES STOCK BALANCE
GRN QTY PRICE AMT SRN QTY PRICE AMT QTY PRICE AMT
KG RM RM KG RM RM KG RM RM

1/01 100 1.00 100 100 1.00 100.00

5/01 100 1.50 150 100 1.00 100.00
100 1.50 150.00
10/1 80 1.00 80 20 1.00 20.00
1 00 1.50 150.00
15/ 1 130 2.308 300 20 1.00 20.00
100 1.50 150.00
130 2.308 300.00

20/ 1 20 1.00 20
30 1.50 45 70 1.50 105.00
130 2.308 300.00

30/1 70 1.50CLOSING STOCK 100

105 2.308 230.80
30 2.308 69 100 2.308 230.80
 STORE LEDGER ACCOUNT – LIFO METHOD

DATE PURCHASES ISSUES STOCK BALANCE

GRN QTY PRICE AMT SRN QTY PRICE AMT QTY PRICE AMT
KG RM RM KG RM RM KG RM RM

1/01 100 1.00 100 100 1.00 100.00

5/01 100 1.50 150 100 1.00 100.00
100 1.50 150.00
10/1 80 1.50 120 100 1.00 100.00
20 1.50 30.00
15/1 130 2.308 300 100 1.00 100.00
20 1.50 30.00
130 2.308 300.00

20/1 50 2.308 115 100 1.00 100.00

20 1.50 30.00
80 2.308 184.64

30/1 80 2.308 185

20 1.50 30 100 1.00 100.00
 STORE LEDGER ACCOUNT –
W E I G H T E D AV E R A G E M E T H O D
DATE PURCHASES ISSUES STOCK BALANCE
GRN QTY PRICE AMT SRN QTY PRICE AMT QTY PRICE AMT
KG RM RM KG RM RM KG RM RM

1/01 100 1.00 100 100 1.00 100.00

5/01 100 1.50 150 100 1.50 150.00
200 1.25 250.00
10/1 80 1.25 100 (80) 1.25 (100.00)

120 1.25 150.00

15/1 130 2.308 300 130 2.308 300.00
250 1.80 450.00
20/1 50 1.80 90 (50) 1.80 (90.00)
200 1.80 360.00
30/1 100 1.80 180 (100) 1.80 (180.00)
CLOSING STOCK 100 1.80 180.00
100 1.80 180.00
= 250.00 / 200
 RETURN FROM PRODUCTION
TO STORE
• Will be recorded as a ‘receipt’ but its
value will not be included in the
calculation of cost of material purchased.
M AT E R I A L • Return at the price when issued.
RETURNS
RETURN FROM STORE TO
SUPPLIER
• Will be recorded as an ‘issue’ but its value
will not be included in the calculation of
cost of cost of material issued.
• Return at the price when purchased.
 STOCK
D I S C R E PA N C I E S

 Occurs when stock checks disclose

discrepancies between the physical
amount of an item in stock and the
amount showed in the stock records.
 The causes of discrepancy should be
investigated and appropriate action taken
to ensure that it does not happen again.
C A U S E O F D I S C R E PA N C I E S

The quantity of stock issued to

Excess stock is returned from
production is different from
production without
that shown on the materials
documentation.
requisition note.

Clerical errors may occur in

Stock stolen by employees.
the stock records.