ACCOUNTING AND VALUATION OF INVENTORY (ISSUES AND CLOSING STOCKS)

Valuation of inventory aims at attaching a monetary value in the stores or issued for production. This is
useful in producing. State costing the output and pricing production, as well as decision making
Methods used in valuing inventory:
a) First In First Out
b) Last In Last Out
c) Weighted Average method
I.41 First in First out (FIFO)
This method is based on the assumption that stock purchased first is issued first. Prices of stock
purchased first are used to determine the cost or value of inventory issued. Closing stocks are carried at
the latest costs.
Advantages
1. It is a realistic system: oldest items are usually issued first out.
2. Unrealized profits or losses do not arise
3. It is easy to calculate if prices of materials don’t fluctuate
4. Closing stocks values reflect the latest costs thus tend to reflect the current market values.
5. It is acceptable to many tax authorities and is also consistent with accounting practices e.g. IAS/IFRS.
Disadvantages
1. It involves tedious calculations if the price of materials fluctuate from time to time
2. Product costs, based on the oldest material prices, lag behind current conditions especially in
inflationary markets.
3. Comparison of one job with another may be difficult if materials are issued at different prices.

.42 Last in first out (LIFO)

Is based on the assumption that the stock purchased last is issued first. Stock valuation should therefore
be based on the prices ruling on the acquisition of the last stocks.

Advantages
1. Product costs tend to be based on current market prices and is therefore realistic.
2. A charge to production is as closely related to current price levels as possible
Disadvantages
1. Stocks are valued at the oldest prices.
2. It involves tedious calculations if the price of materials fluctuate from time to time.
3. Comparison of one job with another may be unfair and difficult
.43 Weighted average method

1
i. This method is a perpetual weighted average system where the issue price is recalculated after each
receipt of stocks taking into account both quantities and money vale of the stocks received.
In this case stock used or unused is based on the average price per unit where the average price per
unit is calculated as follows:
= Total value of stocks = Average Price Per Unit
No. of units of stock

= (Money value of old stocks + Money Value of New Stocks)

(Quantity of old stocks + Quantity of New Stocks)

Illustration
Assume the following purchases were made in ABC Ltd
Date of purchase Units purchased Price/unit
1st January 500 100
2nd January 600 200
3rd January 800 400
Units used on 4th January are 900. Determine the value/cost of units used by using FIFO, LIFO and
weighted average.

Required:
Determine the cost of units used and the value of the closing stocks using FIFO, LIFO and Weighted
Average.

2
Solution
1. FIFO
Cost of units used
Date Units Unit price Total cost
Jan 1 500 100 50,000
Jan 2 400 200 80,000
900 Cost of units used 130,000

Closing stock is valued as

Jan 2 200 units x 200 shillings =
40,000
Jan 3 800 units x 400 shillings = 320,00
0
1,000 360,00
0

2. LIFO
Cost of units used
Date Units Unit price Total cost
Jan 3 800 400 320,000
Jan 2 100 200 20,000
900 Cost of units used 340,000

Closing stock is valued as

Date Units Unit price Total cost
Jan 2 500 200 100,000
Jan 1 500 100 50,000
1,000 Value of closing stocks 150,000

3. Weighted average
Date Units Unit price Total Cost of Issues

0–0 900 257.8 232,105.20

Closing Stock Valuation = (Goods Available – Goods Issued) x Unit Price =

3
 500(100)+ 600 (200)+ 800 ( 400) 490,000
= = 257 . 8
Unit Price = 1, 900 1,900

Other methods include

 Standard cost
 Replacement cost
 Next in first out

HOMEWORK QUESTION FOR DISCUSSION

The following information relates to item P003 stocked by 2000 products Ltd for the month of April
2000:

Receipts Issues
Date Units Units Unit cost (Sh)
April3 2,400 18
4 3,200
6 2,600 20
12 2,700
14 3,000 22
18 2,800 21
20 2,200
22 2,600 23
25 3,800
26 3,100 24
27 2,500 25
28 3,200 26
29 6,900

The closing balance for March 2000 was a batch of 3,000 units received at a unit price of Sh 19.

Required:
a) Stores perpetual inventory record for item P003 for May 2000 under LIFO, FIFO and WEIGHTED
AVERAGE system of stores issues. (14 marks for each method)
b) Closing stock valuation to be recorded in the balance sheet/Statement of Financial position
(6 marks)
(Total: 20 marks)