Valuation of stock

The following are the important methods

1. FIFO- First in first out
2. LIFO- Last in last out
3. Simple Average
4. Weighted Average
FIFO
Materials are issued in the order in which they are
received in the store
Material received first are issued first
Advantages
Simple to understand and easy to operate
Logical method in the sense that materials are
issued in the order of purchase
Gives better prices when prices are falling
Closing stock is shown at current market price
Materials are charged to production at actual cost
price and there is no profit or loss on the materials
issued to production
Useful when transactions are not too many and the
prices of materials are steady.
Disadvantages
 When prices fluctuate, calculation becomes complicated
 Cost of production does not reflect current market price
 Under fluctuating prices, materials charged to different but
similar jobs vary, making it non comparable
 For pricing one issue, more than one price will have to be
taken
 When prices fall, jobs are charged with higher prices of
earlier consignments. Quotation based on this method will
be less competitive.
LIFO
The issues are priced at the unit cost of the latest lot
until the entire quantity of that lot is used up.
Advantages
Simple to operate and is useful when transactions are
not too many and the prices are fairly steady
Material cost in production represents current price
Most suitable when prices are rising
Better matching of cost and revenue
Helps in showing a lower profit in times of rising
prices which reduces the burden of income tax
 Disadvantages
Calculations become complicated when transactions are
frequent and too many.
Comparison between one job and the other becomes difficult
due to variation of prices
Like FIFO, more than one price is to be adopted for pricing a
single requisition
Closing stock does not reflect current market price.So it will
be understated or overstated in the balance sheet.
Not suitable when prices of materials are falling as charge on
production will be low.
Simple Average Method
A price which is calculated by dividing the total of the
prices of the materials in the stock from which the
material to be priced could be drawn by the number of
prices used in that total.
Eg. 500 units purchased @ Rs.20
1800 units purchased @ Rs.22
2600 units purchased @Rs.24
Simple average price=(20+22+24)/3 =22
Advantages
Simple to operate
Reduces variations in the cost and market price
Gives good result, when purchase price does not
fluctuate considerably.
Disadvantages
Issue price of materials does not represent actual cost
price of materials
Does not give good results when the prices of
materials fluctuate considerably
Plenty of clerical work is involved when new lot of
materials is purchased
Profit or loss may arise in the issue of materials
Weighted Average Method
A price which 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.
Weighted Average price=
Total cost of material in stock
______________________________
Total quantity in stock
Advantages
When prices fluctuate considerably, it will smooth out
fluctuations
Recovers cost of materials from production
Eliminates the necessity for adjustments in stock
valuation
New issue price need not be calculated for every issue
unless new lot of material is received
Disadvantages
Calculation is tedious
Material cost being average does not reflect actual cost
price
Stock on hand does not represent current market price
There is an element of profit or loss on issue price.