U.KALPANADEVI II- MBAMICHAEL INSTITUTE OF MANAGEMENT

The inventory includes rawmaterials, stores,

supplies, spareparts, tools, components, assembliespartly finished goods and finished goods.

The objective of inventory control is to achievemaximum possible inventory turnover.

INVENTORY:

1. To ascertain the correct purchase price

2. To calculate the cost of goods issued toproduction

3. To arrive at the closing inventory value. Thissignificantly influences the gross profit or grossloss shown by Trading account.

4. To arrive at the correct financial position of theorganisation by including the closing inventoryvalue in the Balance Sheet.

Objectives of Inventory Valuation

Steps involved in Inventory Valuation

Step1: Physical counting and measurement of stock

Step2: Ascertainment of cost and market price for each item in stock

Step3: Valuing the inventory at cost or net realizable value whichever is less.

Cost Price Methods:a) First in First out (FIFO)

b) Last in last out (LIFO)

c) Specific price

d) Base stock

e) Highest in first out (HIFO)

METHODS OF PRICING MATERIAL ISSUES

Desired from cost prices / Average Price methods

f) Simple average

g) Weighted Average

h)Periodic Simple Average

i)Periodic Weighted Average

j)Moving Simple Average

k)Moving Weighted Average

Notional Price Methods:

l) Standard Price

m) Inflated Price

n) Re-use Price

o) Replacement Price

Under this method, materials received first are

issued first.

When the first lot of materials purchased is exhausted the next lot is taken up for issue.

It works on the presumption that old stock should be used first, and when it gets exhausted, new stock should be used.

As a result, value of closing stock will be at the latest purchase price.

First-In-First-Out [FIFO]:

This is quite opposite to FIFO method. Here,

materials received last are issued first.

Under this method, materials issued to production will be charged at the latest price.

But closing stock will be valued at old price.

Thus, closing stock under this method will be understated

Last- In-First-Out [LIFO]:

Under this method, highest priced materials in stock are issued first.

When such stock gets exhausted, next highest priced materials are issued.

This operates on the premises that consumption should be at the highest

price while inventory should be valued at lowest possible price.

Highest In First Out [HIFO]:

Any organisation will always maintain a minimum

quantity of materials in stock.

Such minimum quantity is called base stock.

It is created out of the first lot purchased and is constantly valued at that price and carried forward.

Quantity in excess of such base stock is issued and priced at FIFO or LIFO method.

Base Stock Method

This is used when materials are procured for a

specific job.

Such materials, when received are earmarked for that specific job for which purchased, and are issued to that particular job when requisition comes.

Specific Price Method

Here the issue price is arrived at by dividing the

sum of rates of different materials in stock [from which materials could have been issued] by the number of rates used in numerator.

For physical issue of materials, FIFO method is used.

Simple Average Price Method

This operates on the premises that when once materials received are binned, they lose their individual identity.

So, the issue price is arrived as follows:

Issue price = Total value of materials in stock / Total quantity in stock

Weighted Average Price Method

Replacement Price Method:

Under this method, the materials issued are valued at a price at which they can be replaced.

Inflated Price Method:

Here the issues are priced at purchase price plus losses due to contingencies like evaporation, wastage in handling and storing, carrying costs, etc.

Under this method, for each type of material, a

standard issue price is worked out, and all the issues made are priced at such standard price.

Any difference between the standard price and actual price, results in material price variance.

If the actual price exceeds the standard, it is called unfavorable price variance.

On the other hand, if the actual price is less than the standard price, it leads to favorable price variance.

Standard Price Method

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