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Inventory Valuation

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Published in: Commerce Subjects | Cost Accounting and Financial Management
2,741 Views

Explains the Concept of Valuation of Inventory and Various Methods of Valuation of Stock.

Dr.Amit G / Delhi

22 years of teaching experience

Qualification: Ph.D ( - 2012), M.Com ( - 2002), MBA/PGDM ( - 2010), B.Com ( - 2000)

Teaches: Accountancy, Economics, Costing, Financial Management, Statistics, BBA Subjects, Management Subjects

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  1. Inventory Valuation
  2. Inventory Systems Periodic Inventory System: The quantity and value of inventory is found out only at the end of the accounting period after having a physical verification of the units in hand. No information is provided regarding quantity and value of materials in hand on a continuous basis. No accounting is done for shrinkage, losses, theft and wastage. Perpetual inventory System : Also known as automatic Inventory System. It is ' A method of recording inventory balances after every receipt and issue to facilitate regular checking and to avoid closing down for stock taking.' Details about quantity and value of stock are available on a continuous basis. 1/10/2018 Dr, Amit Gupta 2
  3. ii. Methods of Valuation of Inventories ( Contd ) First In First Out ( FIFO ): It is assumed that the material first received is the first to be issued or sold. Thus the inventory at any point of time is presumed to be composed of items most recently acquired. Advantaqes: i) It values stock nearer to current market price. ii) It is based on cost, hence no unrealized profit enters into the financial accounts of the company. iii) The method is realistic since the normal procedure is to utilize the material that has been longest in stock. Disadvantaqes: i) Involves complicated calculations and hence increases the possibility of clerical error. ii) Comparison between different jobs using the same type of material gets sometimes difficult. A job commenced a few minutes after another job may have to bear a different charge for material because the first job completely exhausted the supply of material of the particular lot. 1/10/2018 Dr, Amit Gupta 3
  4. Methods of Valuation of Inventories ( Contd ) iii. Last In First Out ( LIFO ): The last item of material purchased is the first to be issued or sold. Hence, inventory consists of items purchased at the earliest cost. Advantaqes :i) It takes into account the current market conditions while valuing material issued to different jobs or calculating the cost of goods sold. ii) The method is based on cost and hence no unrealized profit or loss is made on account of use of this method. 1/10/2018 Dr, Amit Gupta 4
  5. Methods of Valuation of Inventories ( Contd ) iv. 1/10/2018 Highest in First Out : Materials or goods purchased at the highest prices are treated as being first issued or sold, irrespective of the date of purchase. Base Stock method :Based on the contention that each enterprise maintains a minimum quantity of material in its stock. This base stock is deemed to be created out of the first lot purchased and therefore valued at this price and is carried forward as a fixed price. Any quantity over and above the base stock is valued in accordance with any other appropriate method. LIFO method is generally used for the same. Dr, Amit Gupta 5
  6. Methods of Valuation of Inventories ( Contd ) iv. v. 1/10/2018 Next in First Out :lssues are made at the price of materials which has been ordered but not yet received. The attempt is to value material issued at a price which is nearest to market price. Weighted Average Price Method: Based on the assumption that once the material is put into a common bin, it loses its separate identity. Hence the inventory consists of no specific batch of goods. It is priced on the basis of average prices paid for the goods, weighted according to the quantity purchased at each price. Dr, Amit Gupta 6
  7. From the following data, calculate the closing inventory under Ques: weighted average cost of inventory method: March 1: Purchases: March 3: March 10: March 18: March 24: March 30: Issues: March 2: March 9: March 16: March 23: March 31: 1/10/2018 Stock in hand- 500 units @ Rs. 9 each 500 units@ Rs. 11 each 1000 units@ Rs. 12 each 600 units@ Rs. 10 each 500 units@ Rs. 12 each 400 units @ Rs. 300 each 400 units 500 units 900 units 500 units 600 units Dr, Amit Gupta 7
  8. Stores Ledger Date March 1 March 2 March 3 March 9 March 10 March 16 March 18 March 23 March 24 March 30 March 31 1/10/2018 500 1000 600 500 400 Receipts 11 12 10 12 13 400 5,500 500 12,000 900 6,000 500 6,000 5,200 600 Issues 9 10.67 11.88 10.47 11.95 3,600 5,333 10,691 5,235 7,170 500 100 600 100 1,100 200 800 300 800 1,200 600 Balance 9 9 10.67 10.67 11.88 11.88 10.47 10.47 11.43 11.95 11.95 Dr, Amit Gupta 4,500 900 6,400 1,067 13,067 2,376 8,376 3, 141 9, 141 14, 341 7,171 8

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