PPT Nishu Kalra

8/2/2019 PPT Nishu Kalra

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PRESENTATION ON: INVENTORY

VALUATION METHODS

PRESENTED TO: PRESENTED BY:

MS NIDHI WALIA MANDEEP KAUR

MBA-2 (2113)


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FIRST IN FIRST OUT (FIFO)

Under this method, material is first issued fromthe earliest consignment on hand and priced atthe 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 fromthe first purchase issued next, so on until theunits left in the closing stock of materials arevalued at the latest cost of purchases.


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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 thismethod would consist of recent purchase of

materials.


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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.


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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.


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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 consignmentsin the store. The method is not popular as it

always undervalues the stock which amounts to

creating a secret reserve. The method is mainlyused in case of cost plus contracts or monopoly

products as it is helpful in increasing the price of

the contract or products.


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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.


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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.


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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


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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.


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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.


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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 aprice on which they were acquired.


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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.


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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 topurchase price variance account.


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MARKET PRICE METHOD

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