Inventory : Meaning and Classification

ICAI has defined inventory as “tangible property held (i) for sale in the ordinary course
of business or (ii) in the process of production for sale or (iii) for consumption in the
production of goods or service for sale, including maintenance supplies and consumables
other than machinery spares.”
In a manufacturing concern, inventory is classified as follows :
 Raw materials - the materials, components, fuels etc. used in the manufacture of
products.
 Work-in-Progress (WIP) - partly finished goods and materials, sub-assemblies etc. held
between manufacturing stages.
 Finished goods - completely ready for sale or distribution.
The material stock control covers the following areas :
(i) Ordering (ii) Purchase (iii) Receipt (iv) Storage (v) Issues
The normal process of purchasing, storing, control and issue of
materials consists of the following documents :
Bill of Materials
i) Purchase Department; (ii) Stores Department; (iii) Cost
Accounts Department; (iv) Product Department

Purchase Requisition Note . CIMA defines purchase requisition as

“an internal instruction to a buying office to purchase goods or
services. It states their quantity and description and elicits a purchase
order”.
 PURCHASE REQUISITION

Purchase Order
 Material Inspection Note

Material Inspection Note

Purchase Order No. : Dt. : Inspection Note No. :
Material Receipt No. : Dt. : Date :

Sl. No. Description Stores code Quantity Reasons for

Inspected Accepted Rejected
rejection

Special remarks :
Inspector

Goods Received Note

 Stores Requisition Note

STORES REQUISITION NOTE

Job No. : Sl. No. :
Department : Date :
Sl. No.Description Material Code Quantity Rate Value
No. Rs. Rs.

Entered in
Bin Card :
Stores Ledger :Department
Incharge

Material Transfer Note

MATERIAL TRANSFER NOTE

Transfer from : Sl. No. :
Transfer to : Date :
Sl. No. Description Material code No.Quantity Rate Amount
Rs. Rs.

Issuing Deptt. Receiving Deptt.

Bin Card –
Stores Ledger
Methods of Pricing Material Issues
Actual Cost Method
First in First out Method (FIFO) CIMA defines FIFO as “a method of
pricing the issue of material using, the purchase price of the oldest
unit in the stock”.
Further purchases were made during the month as follows :
Issues to shop floor were as follows :
7th October 4,000 Brushes @ Rs. 12.50 16th October
16,000 Brushes
14th October 6,000 Brushes @ Rs. 15.00 28th October
10,000 Brushes
24th October 8,000 Brushes @ Rs. 16.50
You are required :
(a) to prepare a Stores Ledger Card for the month of October on the
assumption that materials were issued on the First-in-First-out
Principle; and
(b) to state the value of closing stock at the end of October if issues
are priced by the Weighted Average Method.
SOLUTION

Last in First out Method (LIFO)

Highest in First Out Method (HIFO)

Simple Average Cost Method

Weighted Average Cost Method

Periodic Average Cost Method

Cost of Total Cost of all receipts

Opening stock +during the period
____________________ ______________
Units in Opening Total Units received
stock +during the period

Standard Cost Method

3 The purchases and issues of material X in the month of January, 2003

is as follows :
Jan. 3 Purchase 800 units @ Rs. 20 per unit. Jan. 9 Issue 600 units.
Jan. 17 Purchase 800 units @ Rs. 20 per
unit. Jan. 11Issue 800 units.
Jan. 8 Purchase 700 units @ Rs. 18 per unit. Jan. 31Issue 1,000
units.
Jan. 25 Purchase 500 units @ Rs. 25 per
unit.
The standard price per unit of material is Rs. 20 fixed for the year
2003. Show the Stores Ledger entries and determine the price variance
for the month of January

SOLUTION
Base Stock Method

Replacement Cost Method (Market Price Method)