COST ACCOUNTING (FIND 413)

Chapter 2
Inventory Valuation

Mrs S.Chitra
MBA, B.E.E, B.A Acct
chitra@asa.edu.my
016-3843396
@kolejasa2020

Main Reference:
Colin Drury (2018). Management and Cost Accounting, 10th Edition, Thomson.

1. Inventory valuation

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1) The correct pricing of issues and valuation of inventory are of the utmost importance because they have a
direct effect on the calculation of profit.

2) Several different methods can be used in practice. Mainly FIFO, LIFO and AVCO.

3) Suppose that there are three units of a particular material in inventory.

Units Date received Purchase cost
A June 20X1 $100
B July 20X1 $106
C August 20X1 $109

4) Format for inventory valuation:

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2. FIFO (first in, first out)

1) FIFO (first in, first out) is 'used to price issues of goods or materials based on the cost of the oldest units
held, irrespective of the sequence in which the actual issue of units held takes place’.
2) Closing stock is, therefore, valued at the cost of the oldest purchases.

2.1 Advantages and disadvantages of the FIFO method

Advantages
It is a logical pricing method which
probably represents what is physically
happening: in practice the oldest
inventory is likely to be used first.
Disadvantages
FIFO can be cumbersome to operate
because of the need to identify each
batch of material separately.

It is easy to understand and explain Managers may find it difficult to

to managers. compare costs and make decisions
when they are charged with varying
prices for the same materials.

The inventory valuation can be near In a period of high inflation, inventory

to a valuation based on replacement issue prices will lag behind current
cost market value.

3.0 LIFO (last in, first out)

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1) LIFO (last in, first out) is 'used to price issues of goods or materials based on the cost of the most recently
received units. Cost of sales in the income statement is, therefore, valued at the cost of the most recent
purchases.

3.1 Advantages and disadvantages of the LIFO method

Advantages Disadvantages
Inventories are issued at a price The method can be cumbersome to
which is close to current market operate because it sometimes results in
value. several batches being only part-used in
the inventory records before another
batch is received.

Managers are continually aware of LIFO is often the opposite of what is

recent costs when making decisions, physically happening and can therefore
because the costs being charged to be difficult to explain to managers.
their department or products will be
current costs.

As with FIFO, decision making can be

difficult because of the variations in
prices.

4.0 AVCO (cumulative weighted average pricing)

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1) Average cost is 'used to price issues of goods or materials at the weighted average cost of all units held'.

4.1 Advantages and disadvantages of AVCO

Advantages Disadvantages
Fluctuations in prices are smoothed The resulting issue price is rarely an
out, making it easier to use the actual price that has been paid, and can
data for decision making run to several decimal places.

It is easier to administer than FIFO Prices tend to lag a little behind current
and LIFO, because there is no need market values when there is gradual
to identify each batch separately. inflation.

Question 1

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Required:
Calculate the closing inventory value using:
a) FIFO
b) LIFO
c) AVCO

5.0 Documentation
You will appreciate that businesses need to keep records of all materials movements in and out of the business

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and within the business. This is achieved using a variety of documents.

These include the following.

Documents Name Explanation Sample

Delivery note When goods are received from a
supplier, the supplier usually
produces a delivery note and asks
the storekeeper receiving the
goods to sign the note as proof of
delivery.

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Goods received note When goods are received from a
supplier, the storekeeper fills in a
goods received note and sends a
copy to the purchasing
department and the accounts
department

Materials requisition When a department requires

materials from stores, a materials
requisition must be filled in and
authorised

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Materials returned If it turns out that the department
note doesn’t need as much material as
first thought, the excess material
should be returned to stores with
a materials returned note.

Materials transfer Sometimes materials are

note transferred from one department
to another. When this happens a
materials transfer note should be
raised.

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