B.Com.

Honours Program: Study material by :

Semester – IV Reema Doma Sherpa
Course: CC- VIII Faculty of Commerce
Cost Accounting Date: 01.07.2021

Unit 2: Elements of Cost: Material

1. Materials: Material/inventory control techniques. Accounting and control of
purchases,storage and issue of materials. Methods of pricing of materials issues —
FIFO, LIFO, Simple Average, Weighted Average.

What is inventory?

Inventory is the goods that your company handles with the intention of selling. It might be raw
materials that you buy and turn into something entirely new, or it might be a bulk product that
you break down into its constituent parts and sell separately. It could even be something
completely intangible: software, for instance.

Types of inventory

There are lots of different types of inventory, and which ones you’ll deal with depends on the
goods you sell. Here’s an overview of some of the types you’re more likely to encounter:

 Finished goods/for-sale goods: The products you sell to your customers

 Raw materials: The inventory you use to make your finished goods
 Work-in-progress: Essentially, unfinished goods — inventory that is part-way

 MRO goods: MRO stands for maintenance, repair and operating. This is the inventory you
use to support the manufacturing process

 Safety stock: The additional inventory you keep in store to deal with supplier shortages or
surges in demand

What is inventory control?

Inventory control is how you manage the stock you currently have in storage. This involves
knowing your stock inside and out — how much is available, where it is and what condition it is
in. It’s also about ensuring that you are storing stock efficiently, keeping inventory costs down
and minimising the time spent counting and controlling inventory.
The techniques or the tools generally used to effect control over the inventory are the following:
1. Budgetary techniques for inventory planning
2. A-B-C. System of inventory control
3. Economic Order Quantity (E.O.Q.) i.e., how much to purchase at one time economically
4. VED Analysis
5. Perpetual inventory system and the system of store verification
6. Fixation of Stock Level
7. Control Ratios

1. Budgetary Techniques: For the purchase of raw materials and stocks, what we required is a
purchase Budged to be prepared in terms of quantities and values involved. The sales stipulated
as per sales Budget of the corresponding period generally works out to be the key factor to
decide the production quantum during the budget period, which ultimately decides the purchases
to be made and the inventories to be planned.

2. A-B-C Analysis: ABC Analysis: ABC System: In this technique, the items of inventory are
classified according to the value of usage. Materials are classified as A, B and C according to
their value.
Items in class ‘A’ constitute the most important class of inventories so far as the proportion in
the total value of inventory is concerned. The ‘A’ items constitute roughly about 5-10% of the
total items while its value may be about 80% of the total value of the inventory.

Items in class ‘B’ constitute intermediate position. These items may be about 20-25% of the total
items while the usage value may be about 15% of the total value.
Items in class ‘C’ are the most negligible in value, about 65-75% of the total quantity but the
value may be about 5% of the total usage value of the inventory.

The numbers given above are just indicative, actual numbers may vary from situation to
situation. The principle to be followed is that the high value items should be controlled more
carefully while items having small value though large in numbers can be controlled periodically.

3. Economics Order Quantity: Economics order quantity represents the size of the order for
which both order, ordering and carrying costs together are minimum. If purchases are made in
large quantities, inventory carrying cost will be high. If the order size is small, ordering cost will
be high. Hence, it is necessary to determine the order quantity for which ordering and carrying
costs are minimum. The formula used for determining economics order quantity is a s follows:
4. VED Analysis: VED- Vital, Essential, Desirable- analysis is used primarily for control of
spare parts. The spare, parts can be divided into three categories – vital, essential or desirable –
keeping in view the critically to production.

5. Perpetual Inventory System: Perpetual Inventory system means continuous stock taking.
CIMA defines perpetual inventory system as ‘the recording as they occur of receipts, issues and
the resulting balances of individual items of stock in either quantity or quantity and value’.
Under this system, a continuous record of receipt and issue of materials is maintained by the
stores department and the information about the stock of materials is always available.

Entries in the Bin Card and the Stores Ledger are made after every receipt and issue and the
balance is reconciled on regular basis with the physical stock. The main advantage of this system
is that it avoids disruptions in the production caused by periodic stock taking.
Similarly it helps in having a detailed and more reliable check on the stocks. The stock records
are more reliable and stock discrepancies are investigated and appropriate action is taken
immediately.

Salient Features of Perpetual Inventory System:

i) It requires more efforts to maintain inventory under this method.
ii) Quantity balances shown by the store ledger and bin cards are reconciled.
iii) A number of items are physically checked systematically and by rotation.
iv) The method is comparatively costly as compared to periodical inventory system.
v) Store ledger and bin cards keeps inventory record up-to date and decent.
vi) The method applies to those concerns usually that sell high-value items (Such as car, personal
computer, equipments etc.) not at a large quantity as compared to items under periodic system.
vii) Causes for difference between physical balances and book balances can be explored.
viii) Making corrective entries in case of discrepancies.

Advantages of Perpetual Inventory System

A) Easy detection of errors: Errors and frauds can be easily detected at an early date. It helps in
preventing their occurrence.

B) Better control over stores: The system exercises better control over all receipts and issues in
such a manner so as to give a complete picture of both quantities and values of stock in hand at
all times.
C) No interruption of production process: Production process is not interrupted as the physical
verification of stock is made on a planned and regular basis.

D) Acts as internal check: Under the system, records are made simultaneously in the bin cards
and stores ledger accounts which acts as a system of internal check for detection of errors as and
when they are committed.
E) Investment in materials kept under control: The investment in materials is kept at a
minimum level as the actual stock is continuously compared with the maximum level and
minimum level.

F) Early detection of loss of stock: Loss of stock due to shrinkage, evaporation, accident, fire,
theft, etc. can be easily detected.

G) Accurate and up-to-date accounting records: Due to continuous stocktaking, the store-
keeper and stores accountant become more vigilant in their works and they maintain accurate and
up-to-date records.

H) Easy to prepare interim accounts: It is possible to prepare periodical profit and loss
account and balance sheet without physical stock-taking being made.

i) Availability of correct stock data- Correct stock data is readily available for settlement of
insurance claims.
6) Fixation of stock level: The object of fixing stock levels for each item of material is to
maintain required quantity of materials in the store and thereby the expenses may be reduced.
The different stock levels are: (1) Minimum stock level (2) Maximum stock level (3) Reorder
stock level
a. Minimum stock level: It represents the minimum quantity of an item of material to be kept
in the store at any time. Material should not be allowed to fall below this level. If the stock goes
below this level, production may be held up for want of materials. This stock is also known as
safety stock level or buffer stock.
b. Maximum stock level: It is the stock level above which stock should not be allowed to rise.
This is the maximum quantity of stock of raw materials which can be had in the stock. It is goes
above, it will be overstocking.
c. Reorder stock level: It is the point at which the storekeeper should initiate purchase
requisition for fresh supply. This level lies between the maximum level and the minimum level.

7) Control Ratios: The control ratios are mainly two:

a) Inventory Turnover Ratio which we have studied and
b) Input-output Ratio.
Inventory Turnover: Inventory Turnover is a ratio of the value of the materials consumed during
a period to the average value of inventory held during that period.
If the inventory turnover rate in terms of value of materials is high, or if the length of the
inventory turnover period is short, the material is said to be fast moving. So if the rate of
consumption is fast or if the inventory turnover rate is good, it is a healthy measure of efficiency
of materials control, as the capital employed is properly utilized.

ii. Input-Output Ratio: The Input-output Ratio is the ratio of the raw material put into
manufacture and the standard raw materials content of the actual output. This ratio enables one to
find out whether the usage of the materials is favourable or not. A standard ratio of input of
materials and output of material should be determined and the actual ratio should be compared
with the standard ratio.
Accounting and control of purchases,storage and issue of materials.

1. Materials control includes physical control of materials and control over the investment in
materials. Effective physical control of materials involves limiting the access to stored materials,
segregating the duties of employees who handle materials and materials reports, and establishing
an accurate recording system for materials purchases and issues. Only authorized personnel
should be permitted in material storage areas, and procedures for moving materials into and out
of these areas should be well established. The following functions of materials control should be
segregated to minimize opportunities for employee misappropriation: purchasing, receiving,
storage, use, and recording. To ensure the accurate recording of purchases and materials issues,
inventory records should document the determination of inventory quantities on hand, and cost
records should provide the data needed to assign a cost to inventories to be used in the
preparation of financial statements.
2. Controlling the materials inventory investment requires analysis and planning to determine
when orders should be placed and the number of units to be ordered. The point at which the
predetermined minimum level of inventory is reached, requiring the item to be ordered, is called
the order point. Calculating the order point is based on the following:
Usage—The anticipated rate at which the materials will be used.
Lead time—The estimated time interval between placing the order and receiving the
materials ordered.
Safety stock—The estimated minimum level of inventory needed to protect
against stockouts.
The order point can be calculated as follows:
(Expected Daily Usage × Lead Time) + Safety Stock
3. The optimal quantity of materials to order at one time, called the economic order quantity,
is the order size that minimizes the total costs of placing orders and of carrying inventory in
stock. Order costs include purchasing, receiving and inspection salaries and wages,
communication costs, and record keeping. Carrying costs include storage and handling; interest,
insurance, and property taxes on inventories; and losses due to theft, spoilage, or obsolescence.
Annual order costs decrease when order size increases while annual carrying costs increase with
increases in order size.

The economic order quantity is the point where total order costs equal total carrying costs, unless
there is a provision for safety stock.

4. Materials control personnel include (a) the purchasing agent who is responsible for
purchasing the materials needed at the most economical price; (b) the receiving clerk who is
responsible for supervising incoming shipments of material; (c) the storeroom keeper who is
responsible for storing and maintaining the goods received; and (d) the production department
supervisor who is responsible for supervising the operations of a particular department and who
prepares or approves material requisitions.
5. The supporting documents used in the procurement process include (a) the purchase
requisition, which is prepared by the storeroom keeper to notify the purchasing agent that
additional materials should be ordered; (b) the purchase order, which is prepared by the
purchasing agent describing the materials ordered, stating terms and prices, and fixing the date
and method of delivery; (c) the vendor’s invoice, which the purchasing agent compares to the
purchase order to verify description of materials, price, terms of payment, method of shipment,
and delivery date; (d) the receiving report, which is prepared by the receiving clerk who counts
and identifies the materials received and records the shipper, the date of receipt, the materials
received, and the number of the purchase order identifying the shipment; and (e) the debit-credit
memorandum, which is prepared when the type, quantity, or quality of goods ordered differs
from that which was shipped and adjustments must be made to the vendor’s invoice. If goods are
to be returned, the purchasing agent will prepare a return shipping order.

6. After materials have been ordered, received, and transferred to the storeroom, they must be
protected from unauthorized use. Materials should not be issued from the storeroom without
written authorization in the form of a properly approved materials requisition. The materials
requisition should identify the specific job or department to which the materials are issued.
Occasionally materials are returned to the storeroom because, for example, more materials were
requisitioned than were actually needed for production or perhaps the wrong type of material was
issued. Returned materials should be accompanied by a returned materials report.
7. All purchases of material should be recorded in the general ledger as a debit to Materials.
The materials account is a control account supported by a subsidiary materials ledger. The
individual accounts in the materials ledger are designed to show the quantity of each material on
hand and its cost. When materials receipts and issues are posted to the materials ledger accounts,
the balance is extended after each entry so that it may be determined when stock is falling below
minimum requirements. Most companies now have automated inventory systems that utilize
online information processing, such as bar coding and optical scanning technology, to update
inventory records on a “real time” basis.
8. There are several acceptable ways of assigning costs to materials as they are issued. Under
the first-in, first-out (FIFO) method of costing, the materials issued are costed at the earliest
prices paid for the materials in stock, and the ending inventories are costed at the most recent
purchase prices. Under the last-in, first-out (LIFO) method of costing, the materials issued are
costed at the most recent purchase prices, and the ending inventories are costed at the prices paid
for the earliest purchases. Under the moving average method,an average unit price is computed
each time a new lot of materials is received, and the new unit price is used to cost all issues until
another lot is received and a new unit price is computed. In choosing an inventory costing
method, the method selected should accurately reflect the income for the period in terms of
current economic conditions. Under conditions of rising prices, the LIFO method is sometimes
selected because the higher priced materials are charged against the increasingly higher sales
revenue, resulting in a more representative earnings picture and a lower income tax liability. The
FIFO method is simpler and less expensive clerically and fairly depicts profits under stable price
conditions. Many companies have adopted the middle-of-the-road position represented by the
moving average method, especially now that computer programs do the computations.

9. All materials issued to production and those returned to stock during a period are recorded
on a summary of materials issued and returned. At the end of the period, the summary
provides the information necessary to record the cost of materials. The total cost of direct
materials requisitioned is recorded by debiting Work in Process and crediting Materials. The
total cost of indirect materials requisitioned is recorded by debiting the appropriate factory
overhead account and crediting materials. Unused materials returned from the factory to the
storeroom are recorded by debiting Materials and crediting Work in Process (direct materials) or
Factory Overhead (indirect materials). Any materials returned to vendors should be recorded by
debiting Accounts Payable and crediting Materials. The balance of the Materials account may be
proven by comparing it to the total of the individual materials ledger account balances.
10. Periodically, the materials on hand should be physically counted and compared to the
individual materials ledger accounts by someone other than the storeroom keeper or materials
ledger clerk.
11. A just-in-time inventory (JIT) system, also known as a lean production
system, significantly reduces inventory-carrying costs by requiring that raw materials be
delivered only when they are ready to be used and by eliminating inventory buffers of raw
materials between manufacturing cells. Many manufacturing functions that were performed in
individual departments in a traditional manufacturing system are combined into work
centers and manufacturing cells in a JIT system. A JIT system can significantly
reduce throughput time, the time that it takes a unit of product to make it through the
manufacturing process, and increase velocity, the speed with which units are produced in the
system. Successful JIT systems require a high degree of coordination with both suppliers and
customers and among work centers.
11. Scrap or waste materials may result from the production process. If the expected sales
revenue from scrap is small, no entry is made for the scrap material until it is sold. At the time of
sale, Cash or Accounts Receivable is debited and Scrap Revenue, Work in Process, or Factory
Overhead is credited depending on whether or not the scrap can be identified with a specific job
or department. If the revenue from scrap is expected to be substantial and the market value is
known, Scrap Material should be debited and Scrap Revenue should be credited at the time the
scrap is inventoried. Scrap Material is credited when the materials are subsequently sold.

Methods of Pricing Material Issues | FIFO, LIFO, Simple & Weighted

Methods of Pricing Material Issues -

Following is a list of the various methods of pricing the material issues :

Important Methods -

1. First In First Out (FIFO) Method -

This methods of material pricing is by far more systematic than the methods discussed above.
The receipts and the issues follow a sequential pattern. i.e. the materials which are received first
are also issued first and when the complete lot is done with them the further receipt is considered
for issue. In simple words, the closing inventory simply represent the stock which was procured
at the last and thus represents the latest price.
This method is suitable during deflation, when the latest prices are low. The obvious reason
being that the material procured at higher rates have already been absorbed and closing inventory
thus appearing at a minimum level following the principles of conservatism.

Implications of FIFO Method in the Periods of Rising or Failing Prices :

 Period Implications of
FIFO Method
1) In Period of. The value of the closing
Rising Prices stock will increase,
resulting in higher profits.
As a result tax liability
will also increase.
2) In Periods of The value of closing
Falling Prices stock will decrease,
resulting in lesser profits.
As a result tax liability
will also decrease.

Advantages of FIFO Method -

Advantages of FIFO method are as follow :

1. Materials are issued on the basis of purchases.

2. It is very simple and easily understandable.
3. The closing inventory is valued at the current level prices.
4. Mostly used in case of perishable goods.
5. Better to follow in case of deflation than inflation to reduce the tax liability.

Disadvantages of FIFO Method -

Disadvantages of FIFO method are as follows :

1. It is difficult to record the returns and rejected items.

2. Regular purchases and issues can make this cumbersome.
3. As in the warehouse, all the materials are kept together, there is no sure that the one which was
purchased earlier is issued first.
4. Due to frequent price changes comparison between similar job become difficult.
5. If followed during inflationary situation, the value of the closing stock will be higher, there by
tax liability will increase.

Example of FIFO Method :

From the following particulars relating to material A, show how the value of the issues should be
arrived and the FIFO method .

Date Particulars
1-1-2019 Opening stock 1000
units at Rs.5 each

Purchases 900 units

3-1-2019 at Rs.6 each
7-1-2019 Issued 1200 units

11-1-2019 Purchased 800

units at Rs.6.20
each

13-1-2019 Issued 1000 units

Solution -

FIFO Method

Stores Ledger Account

Dat Receipts Issues Balance

e
Jan Qty Rate Amt Qty Rate Amt Qty Rate Amt

2019
1 - - - - - - 100 5 5000
0
3 900 6 540 - - - 100 5 5000
0 0
900 6 5400
7 - - - 1000 5 5000 700 6 4200

200 6 1200
11 800 6.20 496 - - - 700 6 4200
0
800 6.20 4960
13 - - - 700 6 4200 500 6.20 3100

300 6.2 1860

2. Last In First Out (LIFO) Method -

Under this method, most recently purchased goods are released first. However, this assumption is
made only for the purpose of valuing the issues of an inventory. This method operates in an
inverse manner to FIFO method. The actual flow of inventory may differ. This method employs
the price of the latest lot until all the units from the lot are exhausted. Afterwards it continuous
with previous lots. If a new batch is received then such batch is considered to be the last lot.

Implications of LIFO Method in Different Time Periods :

Period Implications of
LIFO Method
1) In period of This method leads to
increasing prices lower profit as it
matches old and
higher cost with
current revenues.
2) In period of This method leads to
decreasing prices inflated profit as it
matches old and
lower cost with
current revenues.

Advantages of LIFO Method -

Advantages of LIFO method are as follow :

1. This method is suitable for the time period when price is rising.
2. Since material is charged at the latest price level the cost of production is realistic.
3. It is easy to understand.
4. This leads to minimal unrealised gain.

Disadvantages of LIFO Method -

Disadvantages of LIFO method is as follows :

1. It does not conform to the physical flow of the goods.

2. Inventory is not priced at current market price.
3. Price comparison is different, if similar jobs are carried out using material from different lots.
4. This method is not supported by Income Tax Act or Accounting Conventions.
5. This method leads to inflated profit and tax liability in the time of downward prices and vice
versa.
6. It can be difficult to calculate if there are frequent price changes.

Example of LIFO Method :

Prepare a store ledger account using LIFO method showing pricing of materials from the
following transaction.

Date Particulars

2019 Opening stock 1000 units at Rs.20

each
1 march
Purchased 800 units at Rs.21 each
3 march Issued 1200 units

9 march Purchased 1600 units at Rs.24

each
12
march Issued 1000 units

15 Issued 600 units

march
Purchased 1,000 units at Rs.25
20 each
march
Issued 800 units
25
march

30
march

Solution :

LIFO Method

Stores Ledger Account

Date Receipts Issues Balance

Qty Rate Amt Qty Rate Amt Qty Rate Amt
2019 - - - - - - 1000 20 20000

Mar.

1
3 800 21 16800 - - - 1000 20 20000

800 21 16800
9 - - - 800 21 16800 600 20 12000

400 20 8000
12 160 24 38400 - - - 600 20 12000
0
1600 24 38400
15 - - - 1000 24 24000 600 20 12000
 600 24 14400
20 - - - 600 24 14400 600 20 12000
25 100 25 25000 - - - 600 20 12000
0
1000 25 25000
30 - - - 800 25 20000 600 20 12000

200 25 5000

 Difference Between FIFO and LIFO Method -

Basis of FIFO LIFO

Differences
1. Basic Under this method material Under this method material purchased
assumptions purchased first is issued first. last is issued first.
2. In case of Higher income is reported since old Lower income is reported since current
rising prices cost are matched with current cost are matched with current revenue.
revenue. As a result Income Tax As result Income Tax liability is
liability is increased. reduced.
3. Cost of Cost of goods sold consists of cost of Cost of goods sold equales to cost of
goods sold earlier purchases. recent purchases.
4. Distortion Balance sheet shows the ending Balance sheet is distorted because
in balance inventory at a value near the current ending inventory is understated at old
sheet market price. cost.
5. ending Inventory valuation is done using Ending inventory represents cost of
inventory cost of recent purchases. Ariel purchases.

3. Simple Average Price Method -

When the material are kept in store and they are homogeneous in nature, they tend to get mixed
up with each other in a way that they lost their identity. This makes it rather difficult or almost
impossible at times to identify the lot to which the material belongs and when the above was
procured. So, for pricing purpose the average price is considered till the time the existing lot is
totally consumed. Further, when a new lot is purchased, the price is re-computed again.
The formula for calculation of average price is as follows :
Total unit prices of
All lots in stores
Average price = -----------------------------------
 Total no. of unit prices

Note : The price for lot that has been totally issued on FIFO method is not taken into
consideration.

Advantages of Simple Average Price Method -

Following are the advantages of simple average price method :

1. The end result are often accurate when identical purchases are made at a similar rate.

2. Even through the purchases are being made at an inflated or deflected rate, the prices are not
affected much.

3. Simplicity of the method makes it easily operational.

Disadvantages of Simple Average Price Method -

Disadvantages of simple average price method are as follows :

1. Closing inventory is not easily identifiable.

2. As the material issued carries a different price then the price at which it was procured. There
will arise certain profit or loss in this case.

3. The end results may not be accurate where the purchasers are not similar and when there is
fluctuation in prices.

4. Number of units at level of price is ignored. Weighted is only given to the prices and not be
quantity. This makes this method impractical.

5. Closing inventory may appear to be negative in inflationary situation.

Suitability -
Simple average price method is suitable in the following cases :
1. When prices at which the purchases are made do not very much.

2. It will give accurate outcome only when the material is procured in uniform numbers.

Example :
Prepare a store ledger account by simple average method from the following transaction.

Date Particulars

2019

1 sept.
Opening stock 1200 units at Rs.14 each
 Purchased 600 units at Rs.15 each

Issued 1000 units

5 sept.
Purchased 1800 units at Rs.16 each

Issued 1200 units

7 sept. Issued 400 units

Purchased 800 units at Rs.18 each

Issued 1000 units

13 sept.

18 sept.

21 sept.

26 sept.

29 sept.

Solution :
Simple Average Method
Stores Ledger Account

Date Receipts Issues Balance

Qty Rat Amt Qty Rate Amt Qty Rate Amt
e
2019

Sept - - - - - - 120
. 0 14 16800

1
5 600 15 9000 - - - 160 - 25800
0
7 - - - 1000 14.5 14500 800 - 11300
0
13 1800 16 28800 - - - 260 - 40100
0
18 - - - 1200 15.0 18000 140 - 22100
0 0
21 - - - 400 16.0 6400 100 - 15700
0 0
26 800 18 14400 - - - 180 - 30100
0
29 - - - 1000 17.0 17000 800 - 13100
0

Working Note :
1) First issue price on 7th September : Cumulative receipts 1800, cumulative issues : nil.
14+15
SAP = ---------------- = 14.50
2

2) Second issue price on 8 sept. : cumulative receipts 3600, cumulative issues : 1000
14+15+16
SAP = ---------------- = 15.00
3

3) Third issue price on 21 Sept. : cumulative receipts 3600 : cumulative issues : 2200
As 2200 units exceed stock as on 1st September and stock received on 5th September, i.e. 1800
units, the rate Rs.14 and Rs.15 will not be considered for calculating simple average price.
16
SAP = --------- = 16.00
1

4) Fourth issue price on 29 sept. : cumulative receipt 4400, cumulative issues : 2600
As 2600 unit exceed stock as on 1st September and stock received on 5th September i.e. 1800
units at Rs.14 and Rs.15 will be ignored.
16+18
SAP = ---------------- = 17.00
2

5) Closing Stock = opening stock + receipts - consumption or issues

= (16800+9000+28800+14400)-(14500+18000+6400+17000)
= 16000+52200-55900
= 13100

4. Weighted Average Price Method -

Weighted average price of the materials procured is considered and the quantity is duly taken
into account. This method follows a practical approach as compared with the other methods. The
issue price calculated is a realistic one and in ratio of the material procured. Every time a new lot
is procured. Weighted average price is recomputed.
The formula for calculating weighted average price is as follows :
Total cost of materials in stock
WAP = ---------------------------------------------------
Total quantity of material in stock

This method is not suitable when the quantity in each lot varies.

Advantages of Weighted Average Price Method -

Following are the advantages of weighted average price method :

1. There is not much of critical work as the price of issue is constant till the expiry of the current
lot.

2. Which method is simple and easy.

3. The value of closing inventory calculated is quite accurate and can be taken into consideration
while preparation the financial statements.

4. When prices fluctuate the debits are set off as against the credits, thus no profit and loss exist
on account of issues.

Disadvantages of Weighted Average Price Method -

Following are the disadvantages of weighted average price :

1. In order to minimize clerical error, calculations are made to 4/5 decimal places, which makes
the job tedious.

2. Closing inventory is valued at per the calculations and not the current cost.

3. The issues continue to be made at a fixed price even after the previous lot of stock has been
totally consumed till the new stock comes in.

Example :
Using the given transactions prepare a store ledger account by weighted average method.

Date Particulars

2019 Opening stock

1000 units at
1 march Rs 20 each

Purchased 800
units at Rs.21
each
3 march Issued 1200
units
9 march
Purchased
12 march 1600 units at
Rs.24 each

Issued 1000
15 march units

20 march Issued 600

units
25 march
Purchase 1000
units at Rs.25
each
30 march
Issued 800
units

Solution :
Weighted Average Method
Stores Ledger Account
Date Receipts Issues Balance
Qty Rat Amt Qty Rate Amt Qty Rate Amt
e
2019
Mar. - - - - - - 100 20.00 20000
0
1
3 800 21 16800 - - - 180 20.44 36800
0
9 - - - 1200 20.44 24528 600 20.44 12272
12 1600 24 38400 - - - 220 23.03 50672
0
15 - - - 1000 23.03 23030 120 23.03 27642
0
20 - - - 600 23.03 13818 600 23.03 13824
25 1000 25 25000 - - - 160 24.26 38824
0
30 - - - 800 24.26 19408 800 24.26 19416
Working Notes :

1) First issue price on 3rd March -

20000+16800
WAP = ------------------------- = 20.44
1000+800

2) Secound issue price on 12 March -

50672
WAP = ------------- = 23.03
2200

3) Third issue price material not purchased -

WAP = 23.030

4) Fourth issue price on 25 march -

13824+25000
WAP = -------------------------- = 24.26
600+1000

The fresh issue rate is determined after each purchase and not at the time of his issue. Thus, as
soon as fresh supply is received, a new price is calculated and all issues are then valued at that
price until the next reply is received when a new issue price will be calculated.

Conclusion :

1. Weighted average method is preferred where prices do not change frequently as it spreads the
input more frequently.

2. In case of rising prices of purchase if production cost are lower and stock value are higher in
the FIFO method, revised by LIFO method. Weighted and simple average methods both spread
the rising purchase cost between production and closing stock, weighted average method
equitably, simple average erratically.

3. Complete cost of receipts will be covered while the issue of closing stock when FIFO. LIFO
weighted average method is used, whereas while use of simple average method gain or loss will
be created.

4. Given that prices change frequently weighted average method involves more calculations and
may not produce an exact unit price. FIFO and LIFO methods would be preferable since no
calculations are necessary to establish the issue prices throughout the year.