Basis of Differences FIFO LIFO

1. Basic assumptions Under this method material Under this method material
purchased first is issued first. purchased last is issued first.
2. In case of rising prices Higher income is reported Lower income is reported
since old cost are matched since current cost are
with current revenue. As a matched with current revenue.
result Income Tax liability is As result Income Tax liability is
increased. reduced.
3. Cost of goods sold Cost of goods sold consists of Cost of goods sold equates to
cost of earlier purchases. cost of recent purchases.
4. Distortion in balance Balance sheet shows the Balance sheet is distorted
sheet ending inventory at a value because ending inventory is
near the current market price. understated at old cost.
5. ending inventory Inventory valuation is done Ending inventory represents
using cost of recent purchases. cost of Ariel purchases.
Prepare a store ledger account by simple average method from the following transaction.
Prepare a store ledger account by simple average method from the following transaction.
 Date Particulars
1-Mar-2019 Opening stock 1000 units at Rs 20 each
3-Mar-2019 Purchased 800 units at Rs.21 each
9-Mar-2019 Issued 1200 units
12-Mar-2019 Purchased 1600 units at Rs.24 each
15-Mar-2019 Issued 1000 units
20-Mar-2019 Issued 600 units
25-Mar-2019 Purchase 1000 units at Rs.25 each
30-Mar-2019 Issued 800 units
Moving Average – Example
Let us take the example of the stock price of a company
to explain the concept of moving average. The stock
prices for the last 12 days are as follows:
Predict the stock price on the 13th day using 4- day
simple moving average.
Solution:

Weighted Moving Average Example:

Let us take the above example to predict the stock price on the 13th day using 4- day
weighted moving average such that most recent to last weightages are 0.50, 0.30, 0.15
and 0.05.

Solution:
Moving Average is calculated using the formula given below
Weightage Moving Average = (A1*W1 + A2*W2 + …… + An*Wn)
 Based on a 4-day weighted moving average the stock price is expected to be $31.73 on
the 13th day.
Pricing Engineering Equipment, Parts And Tools.
Pricing engineering equipment means estimating the cost of operation of all the
Engineering equipment used in a project. The pricing is done based on two factors –
ownership cost and operating cost of the equipment. Thorough knowledge of the
ownership and operating costs is necessary for proper project management and executing
profitable construction.

The commonly used Engineering equipment is material handling equipment, Conveyors,

Miscellaneous equipment etc.

A) Ownership cost:
Ownership costs are fixed costs and are calculated on annual basis. The estimator must
perform proper financing of the ownership cost. Ownership cost includes:
•Initial capital cost
•Depreciation
•Investment cost
•Insurance cost
•Taxes
•Storage cost

B) Cost of operating Engineering equipment

The cost of operating construction equipment includes the following factors:
•Maintenance cost
•Consumable cost
•Mobilization cost
•Operator cost
•Special items cost

A.1 Initial Cost

The initial cost is about 25% of the total annual cost of the machinery. The initial cost is the
cost at the time of equipment sales that a contractor pays for purchasing the machines.
The initial cost consists of the factory price of the machine (inclusive of the extra
equipment and taxes), shipping cost, cost of assembly, and other overhead costs paid by
the contractor before equipping the asset.

A.2 Depreciation
Depreciation is defined as the reduction in the market value of the equipment. Due to age,
wear, and deterioration, the value of equipment can depreciate. Hence, depreciation
occurs due to the physical deterioration, due to the continuous wear and tear of the
equipment, and obsolescence occurring with time. The term depreciation is used to state
the change of assets (equipment) value from year to year. The depreciation is also
affected by the rental rate of the equipment. Rental rate is the rate that the owner of
equipment incurred while leasing the equipment to another contractor for use. Hence, it is
necessary to consider the rental rate as well, while calculating depreciation. While
calculating the depreciation, the initial cost and equipment life should be known. The initial
cost should include the base price of the equipment, sales tax, transportation cost, and
initial assembly cost.

The various methods used for calculating depreciation are:

•Straight-line depreciation
•Sum of years' digit depreciation
•Double declining balance depreciation

A. 2.1 Straight-line depreciation

In straight-line depreciation, it is assumed that the equipment will lose the same
amount every year until it reaches its salvage value. Salvage value is the expected amount
of the equipment during its resale after completion of its useful life. The straight-line
depreciation is calculated using the formula given below,

A. 2.2 Sum of years digit depreciation

In the sum of years' digit depreciation, it is assumed that the amount of depreciation
after 1 year is not straight. This type of depreciation is calculated using the formula given
below.

A. 2.3 Double declining balance depreciation

In this method, the depreciation is calculated by considering accelerated
depreciation. The depreciation in this method is calculated using the formula given below.
A. 3 Investment cost
The investment cost is the annual cost of the money invested for the equipment. If
the equipment is purchased on loan, then the investment cost includes the interest amount
as well. The investment cost is calculated using the formula given below.

A. 4,5,6 Insurance cost,

taxes, and storage cost
Insurance cost is the cost invested for the insurance of the equipment from fire, theft,
accident, or any type of damage. Taxes are the cost paid for the property tax and licenses.
Storage cost includes the rental cost of the yards which the contractor pays for leasing the
yard, where the equipment is to be stored.

B. 1 Maintenance cost
The construction equipment faces a lot of wear and tear. Hence, frequent repair and
maintenance are required to be done by the contractor. The wear and tear of machinery
vary from site to site depending upon the site conditions. The maintenance cost is more for
the older equipment. Good maintenance, timely wear measurement, proper attention, and
regular cleaning are some of the methods to reduce the operating cost. The hourly repair
cost is calculated using the formula given below,

B.2 Consumable costs

Consumable costs include fuel costs and lubricating oil costs. The contractor must use the
machinery properly to achieve fuel and oil economy. The fuel costs vary for different types
of machines. The quantity of oil required can be calculated using the following formula

B.4,5,6 Mobilization cost, operator cost, and special item cost

Mobilization cost is the cost of moving the equipment from one place to another. Operator
cost is the wages of the operator who operates the machinery. Special items cost includes
the cost of replacement of high wear items such as blades, shanks, end bits, the rental
cost of small items, and so on.

Pricing Engineering Equipment Parts, And Tools

Pricing used equipment, however, is often difficult because of the specificity of the
equipment along with numerous other variables like:
Age and condition of the item,
models and features,
supply and demand, and
economic climate will all play a factor in determining the equipment’s fair market value.

Generic vs. Specific

A more generic piece of machinery is far more likely to sell for a higher price than a piece
of equipment that has been customized for your application. Buy why? A customized
machine often costs significantly more than a generic unit. Shouldn’t that increase the
value?
For example, Canadian industry often uses 600V instead of 480V as the main voltage in
most machinery applications. When Canadian corporations order machinery, they have the
electrical system reconfigured for 600V. Doing so makes the machinery unusable in US
applications.

Economic cost
Economic cost looks at the gains and losses of one course of action versus another.
It does this in terms of time, money, as well as resources. The term also includes
determining the gains and losses that might have occurred by taking another course of
action.

Opportunity Cost:
Opportunity cost is the difference in options—in other words, what you are passing up
when choosing one option over the other.

Examples:

Economic Cost at a Personal Level

The mode of transport that you choose to get to work is an example of economic cost.
Let’s say that you have three transportation options to get to work.
1.driving your own car
2.taking the bus
3.cycling to work

Economic Cost in Business

A t-shirt printing business uses two methods to print on the t-shirts. Once involves
attaching a cloth sticker, while the other involves embroidering the text or image. The
business wants to increase production of one of the methods. This means either hiring
more staff that can work the sewing machines, or purchasing a machine that can attach
the cloth stickers at a faster pace. The difference in the required budget for each option is
inconsequential. However, the current budget does not allow for investment in both
production methods. The economic cost of either choice is the cost of foregoing the other
option.
Activity-Based Costing (ABC):
Activity-based costing (ABC) is a costing method that assigns overhead and indirect
costs to related products and services. This accounting method of costing recognizes the
relationship between costs, overhead activities, and manufactured products, assigning
indirect costs to products less arbitrarily than traditional costing methods. However, some
indirect costs, such as management and office staff salaries, are difficult to assign to a
product.

How Activity-Based Costing (ABC) Works?

Activity-based costing (ABC) is mostly used in the manufacturing industry since it

enhances the reliability of cost data, hence producing nearly true costs and better
classifying the costs incurred by the company during its production process.

The ABC calculation is as follows:

1.Identify all the activities required to create the product.
2.Divide the activities into cost pools, which includes all the individual costs related
to an activity—such as manufacturing. Calculate the total overhead of each cost
pool.
3.Assign each cost pool activity cost drivers, such as hours or units.
4.Calculate the cost driver rate by dividing the total overhead in each cost pool by
the total cost drivers.
5.Divide the total overhead of each cost pool by the total cost drivers to get the cost
driver rate.
6.Multiply the cost driver rate by the number of cost drivers.