Cact 3

A Project Report on
VALUATION OF
MATERIAL ISSUE
Subject- Cost Accounting
Name of the Investigator: Tasha Khandelwal
CHSE Roll No: 231KA005
Registration No: KA31C22005
Name of the Institution: MPC Higher Secondary School, Baripada
Name of the examination with year: Annual HS Exam - 2024
Signature of the Student:
Date of Submission:
Signature of Internal Examiner Signature of External Examiner

ABSTRACT
This project report is entitled "Valuation of Material Issue". The main objective of the study is
to understand concept of valuation of material issue. This project consists of the features of a
good method of material issues, some important methods of material issues i.e., First In First
Out (FIFO), Last In First Out (LIFO) and Average Cost Method. I chose this project because I
wanted to learn more about the valuation of material issue. Material valuation helps in
determining the price of the material. Material is the most important element of cost. For this
reason, it should be valued and charged to cost units properly. The concept of valuation means
determining the true value in money (of a transaction) and usually involves several steps:
discussion, research, and review. The purpose is to arrive at a figure which has an accurate
understanding.
CONTENTS
Serial Page
Topic
No. No.
1. ISSUE OF MATERIALS 1
FEATURES OF A GOOD METHOD OF MATERIAL ISSUES 1
METHODS OF ISSUE OF MATERIALS 1
2. FIRST IN FIRST OUT (COMMONLY CALLED FIFO) METHOD 2
ADVANTAGES OF FIFO METHOD 2
DISADVANTAGES OF FIFO METHOD 2
3. LAST IN FIRST OUT (COMMONLY CALLED LIFO) METHOD 4
ADVANTAGES OF LIFO METHOD 4
DISADVANTAGES OF LIFO METHOD 4
4. AVERAGE COST METHOD 6
ADVANTAGES OF AVERAGE COST METHOD 6
DISADVANTAGES OF AVERAGE COST METHOD 6
SIMPLE AVERAGE PRICE 6
WEIGHTED AVERAGE PRICE 6
5. CONCLUSION 11
6. REFERENCE 12
ISSUE OF MATERIALS
The third stage of material control is issue control i.e., control is exercised when materials are
issued for production. Materials are kept in stores so that the storekeeper may issue them
whenever these are required by the production departments. But a storekeeper must not issue
materials unless a properly authorised material requisition is presented to him.
Material Requisition- The storekeeper should always issue the material on proper authority
to avoid the misappropriation of material. This authority is usually given by the foreman of the
production department on a form known as material requisition.
Bills of Materials- A bill of materials gives a complete list of all materials required with
quantities for a particular job, order, or process. Thus, all materials required for a particular job,
order or process are listed by the production department on a single document. This bill serves
the purpose of material requisition and all materials listed on the bill are sent to the production
department.
Difference between Material Requisition and Bills of Materials: –
Material requisition is a document authorising the storekeeper to issue materials stated therein
to the consuming department. Bill of materials on the other hand is a document which gives a
list of all materials required with specifications and quantities for a particular job, order or
process.
Features of a Good Method of Material Issues

A good method of valuing material issues should satisfy the following conditions:
(i) The issue price should recover the cost price of the materials.
(ii) The issue price must be near the market price so that the effect of current market prices
is revealed in the cost of issues.
(iii) The issue price should not lead to any significant variation in cost of similar jobs from
period to period so far as materials are concerned, otherwise comparison of similar
jobs will become difficult.
(iv) The issue price should not necessitate heavy adjustments in values of stock of
materials in the stores ledger at the end of the year. It will make the stores ledger
complicated.
METHODS OF ISSUE OF MATERIALS
There are many methods of pricing material issues, the most important being:
(i) First In First Out.
(ii) Last In First Out.
(iii) Base Stock.
(iv) Simple Average Method.
(v) Weighted Average Method.
1
First In First Out (commonly called FIFO) Method
In this method, materials received first are issued first. First come, first served is the basis
of issuing material. The units in the opening stock of materials are treated as if they are issued
first, the units from the purchase issued next, and so on. It follows that unit costs are
apportioned to cost of production according to their chronological order of receipts in the store.
This method is most suitable in times of falling prices.
Advantages of FIFO Method
(i) It is simple to understand and easy to operate.
(ii) It is a logical method as the materials received first are utilised first.
(iii) Materials are issued at the purchase price, so the cost of materials is recovered.
(iv) This method is suitable when the items are bulky, slow moving, and costly.
(v) This method is useful when prices are falling.
(vi) Closing stock of materials will be valued at the market price as the closing stock under
this method would consist of recent purchase of materials.
(vii) This method is also useful when transactions are not too many and prices of materials
are steady.
Disadvantages of FIFO Method

(i) In case of fluctuation in price of material, calculation becomes complicated.
(ii) When price fluctuates, there is possibility of clerical error.
(iii) For pricing one requisition of material, more than one price has often to be taken.
(iv) When prices rise, the issue price does not reflect the market price as materials are
issued from the earliest consignments.
Example ⸺
Prepare the Stores Ledger Account from the following information pricing the issued
material on FIFO Method.
Receipt of Materials
1st January 2023 300 units @ ₹ 8 per unit
7th January 2023 200 units @ ₹ 8.20 per unit
23rd January 2023 400 units @ ₹ 7.50 per unit
Issue of Materials
5th January 2023 140 units
22nd January 2023 200 units
2
Solution ⸺ STORES LEDGER ACCOUNT
Receipts Issues Balance
Date Particulars
Quantity Rate Amount Quantity Rate Amount Quantity Rate Amount
2023 Units ₹ ₹ Units ₹ ₹ Units ₹ ₹
Jan.1 Goods Received Note No…. 300 8 2400 300 8 2400
5 Requisition Slip No…... 140 8 1120 160 8 1280
160 8 1280
7 Goods Received Note No…. 200 8.20 1640
200 8.20 1640
100 8 800
8 Requisition Slip No…... 60 8 480
200 8.20 1640
100 8 800
15 Goods Received Note No…. 250 7.90 1975 200 8.20 1280
250 7.90 1975
100 8 800 180 8.20 1476
15 Requisition Slip No…...
120 8.20 164 250 7.90 1975
180 8.20 1476
30 7.90 237 220 7.90 1738
22 Requisition Slip No…... 200 7.90 1580 20 7.90 158
20 7.90 158
400 7.50 3000
20 7.90 158
130 7.50 975 270 7.50 2025
270 7.50 2025
200 7.70 1540
30 7.50 225
29 Requisition Slip No…... 240 7.50 1800
200 7.70 1540
Stock at the end: 30 units @ ₹ 7.50 = ₹ 225

200 units @ ₹7.70 = ₹ 1540
230 units ₹ 1765
3
Last In first Out (commonly called LIFO) Method
As against the First In First Out Method, the issues under this method are priced in the reverse
order of purchases i.e., the price of the latest available consignment is taken. This method is
based upon the assumption that the last item purchased are the first to be issued. In this
method, the issue price of material is equal to the price of material purchased last. This method
is suitable in times of rising prices.
Advantages of LIFO Method
(i) Like FIFO, this method is simple to operate. It is useful when transactions are not too
many and the prices are steady.
(ii) Like FIFO, this method recovers cost from production because actual cost of material
is charged to production.
(iii) LIFO can provide tax advantages in certain situations.
(iv) It can better match current cost with current revenue.
(v) It can help reduce income volatility.
(vi) It encourages the efficient management of inventory.
(vii) In times of rising prices, LIFO method of pricing issues is suitable because materials
are issued at current market prices which are high.
Disadvantages of LIFO Method
(i) Under this method, material purchased at last are issued first. Hence, material
purchased earlier become obsolete.
(ii) For pricing a single requisition, more than one price has often to be adopted.
(iii) The stock in hand is valued at price which does not reflect current market price.
Consequently, closing stock will be understated or overstated in the Balance Sheet.
(iv) LIFO may not provide a clear picture of the true economy value of a company’s
inventory.
Example ⸺
Prepare the Stores Ledger Account for the following transactions according to LIFO
method of pricing issue of materials.
2023, January 1 Received 1,000 kgs. @ ₹ 20 per kg.
2023, January 10 Received 260 kgs. @ ₹ 21 per kg.
2023, January 20 Issued 700 kgs.
2023, February 5 Received 430 kgs. @ ₹ 25 per kg.
2023, February 21 Received 300 kgs. @ ₹ 23 per kg.
2023, March 16 Issued 650 kgs.
2023, April 12 Issued 240 kgs.
2023, May 10 Received 500 kgs. @ ₹ 22 per kg.
2023, May 25 Issued 380 kgs.
4
Solution ⸺
STORES LEDGER ACCOUNT

Date Particulars
Jan. 1 Goods Received Note No…. 1000 20 20000 1000 20 20000
1000 20 20000
10 Goods Received Note No…... 260 21 5460
260 21 5460
260 21 5460
20 Requisition Slip No….
440 20 8800 560 20 11200
560 20 11200
Feb.5 Goods Received Note No…. 430 25 10750
430 25 10750
560 20 11200
21 Goods Received Note No…... 300 23 6900 430 25 10750
300 23 6900
300 23 6900 560 20 11200
Mar. 16 Requisition Slip No…...
350 25 8750 80 25 2000
80 25 2000
Apr. 12 Requisition Slip No…...
160 20 3200 400 20 8000
400 20 8000
May 10 Goods Received Note No…. 500 22 11000
500 22 11000
400 20 8000
25 Requisition Slip No…... 380 22 8360 120 22 2640
Stock at the end: 400 kgs. @ ₹ 20 = ₹ 8000

120 kgs. @ 22 = ₹ 2640
520 kgs. ₹ 10640
5
Average Cost Method
The principle on which the average cost method is based is that all the materials in store are so mixed
up that an issue cannot be made from any particular lot of purchases and, therefore, it is proper if the
materials are issued at the average cost of materials in store. Under this method, all issues of material
are priced at a single price which is an average of a number of different prices at which materials are
purchased.
Advantages of Average Cost Method

(i) This method is rational, systematic, and not subject to manipulation.
(ii) Average price method is considered to be the best method when prices fluctuate considerably
because this method tends to smooth out fluctuations in prices.
(iii) Issue prices are not to be calculated each time issues are made. Issue prices are changed only
when new lot of materials is received.
(iv) This method recovers the cost of materials from production.
(v) This method maintains the issue prices as near to the market prices as possible.
(vi) This method eliminates the necessity for adjustments in stock valuation.
Disadvantages of Average Cost Method

(i) The greatest disadvantage of this method is that a fresh rate calculation will have to be made
as soon as a new lot of materials is purchased which may involve tedious calculations. Thus,
there are chances of clerical work.
(ii) Issue price of materials does not represent actual cost price of materials issued but it represents
average cost of materials in stores.
(iii) At the time of rising prices, it overstates profit but not as much as FIFO because average price
is lower than the most recent price.
(iv) Closing stock is not valued at current cost.
Average may be of two types:
(a) Simple Average Price
A price which is calculated by dividing the total of the prices of the materials in the stock
from which the material to be priced could be drawn by the number of prices used in that total. This
method may lead to over-recovery or under-recovery of cost of materials from production because
quantity purchased in each lot is ignored.
(b) Weighted Average Price

A price which is calculated by dividing the total cost of materials in stock from which the
materials to be priced could be drawn by the total quantity of materials in that stock. The weighted
average price takes into account the price and quantity of the materials in store. It is better to issue the
material at weighted average price method because it recovers the cost price of the materials from
production.
Example ⸺Prepare a Stores Ledger Account from the following information using (a) Simple
Average Method and (b) Weighted Average Method.
2023, October 1 – Opening stock 1000 units @ ₹ 50 per unit
2023, October 10 – Purchased 250 units @ ₹ 52 per unit
2023, October 12 – Issued 500 units
6
2023, October 30 – Issued 1200 units
Solution ⸺
(a) Simple Average Method

Date Particulars
Qty. Rate Amt. Qty. Rate Amt. Qty. Amt.
2023 Units ₹ ₹ Units ₹ ₹ Units ₹
Oct.1 Balance b/d 1000 50000
10 Goods Received Note No…. 250 52 13000 1250 63000
12 Requisition Slip No…. 500 51 25500 750 37500
30 Requisition Slip No…. 1200 55.50 66600 750 37600
Stock at the end: 750 units amounting to ₹ 37600.
Workings: Calculation of Simple Average Rate ⸺

₹ 52+₹ 50 ₹ 55+₹ 56
Rate (on 12-10-2023) = = ₹51 Rate (on 30-10-2023) = = ₹55.50
2 2
(b) Weighted Average Method

Date Particulars
Oct.1 Balance b/d 1000 50000
Workings: Calculation of Weighted Average Rate ⸺

₹ 63000 104500
Rate (on 12-10-2023)= = ₹ 50.40 Rate (on 30-10-2023)= ₹ = ₹ 53.58
1250 𝑢𝑛𝑖𝑡𝑠 1950 𝑢𝑛𝑖𝑡𝑠
7
Example ⸺ Prepare the Stores Ledger Account from the following information pricing the
issued material on (a) Simple Average, (b) Weighted Average, (c) FIFO, and (d) LIFO Method.
Jan. 1. Purchase 300 units @ ₹ 3 per unit Jan. 10. Issue 500 units
Jan. 5. Purchase 600 units @ ₹ 4 per unit Jan. 15. Issue 800 units
Jan. 12. Purchase 700 units @ ₹ 4 per unit Jan. 30 Issue 100 units
Jan. 20. Purchase 300 units @ ₹ 5 per unit
(a) Simple Average Method
Date Particulars
Jan.1 Goods Received Note No…. 300 3 900 300 900
15 Requisition Slip No…. 800 4 3200 300 1150
Workings: Calculation of Simple Average Rate ⸺
₹ 3+₹ 4 ₹7 ₹ 4+₹ 5 ₹9
Rate (on 10-01-2023) = = = ₹ 3.5 Rate (on 30-01-2023) = = = ₹ 4.5
2 2 2 2
₹ 4+₹ 4 ₹8
Rate (on 15-01-2023) = = =₹4
2 2
(b) Weighted Average Method

Date Particulars
Jan.1 Goods Received Note No…. 300 3 900 300 900
Workings: Calculation of Weighted Average Rate ⸺

₹ 3300 ₹2360
Rate (on 10-01-2023) = = ₹ 3.7 (𝑎𝑝𝑝𝑟𝑜𝑥) Rate (on 30-01-2023) = = ₹4.4(𝑎𝑝𝑝𝑟𝑜𝑥)
900 600
₹ 4250
Rate (on 15-01-2023) = = ₹ 3.9 (𝑎𝑝𝑝𝑟𝑜𝑥)
1100
8
(c) FIFO Method

Date Particulars
300 3 900
600 4 2400
300 3 900
10 Requisition Slip No….
200 4 800 400 4 1600
400 4 1600
12 Goods Received Note No…. 700 4 2800
700 4 2800
400 4 1600
400 4 1600 300 4 1200
300 4 1200
300 5 1500
200 4 800
300 5 1500
Stock at the end: 200 units @ ₹ 4 = ₹ 800

300 units @ ₹ 5 = ₹ 1500
500 units ₹ 2300
9
(d) LIFO Method

Date Particulars
300 3 900
600 4 2400
300 3 900
10 Requisition Slip No…. 500 4 2000
100 4 400
300 3 900
12 Goods Received Note No…. 700 4 2800 100 4 400
700 4 2800
700 4 2800
100 4 400 300 3 900
300 3 900
300 5 1500
300 3 900
200 5 1000
Stock at the end: 300 units @ ₹ 3 = ₹ 900

200 units @ ₹ 5 = ₹ 1000
500 units ₹ 1900
10
CONCLUSION
The choice between LIFO (Last In, First Out), FIFO (First In, First Out), simple average, and
weighted average methods in inventory valuation impacts financial reporting and reflects
different cost-flow assumptions.
▪ LIFO assumes that the last items added to inventory are the first to be sold. This method
can be beneficial during inflationary periods as it results in lower taxable income due
to higher cost of goods sold (COGS). However, it may not reflect the current market
value of inventory.
▪ FIFO assumes that the first items added to inventory are the first to be sold. This method
often results in a higher ending inventory and can provide a more accurate
representation of current market values. However, it may lead to higher taxable income
during inflationary periods.
▪ Simple average takes the average cost of all units in inventory. While straightforward,
it may not align well with the actual flow of costs, especially if there are significant
variations in unit costs. It is a basic method suitable for inventory with relatively stable
and predictable costs.
▪ Weighted average considers the average cost based on both the quantity and cost of
items in inventory. It provides a compromise between FIFO and LIFO and is suitable
when there are fluctuations in unit costs. However, it may not precisely represent the
actual cost of specific items in inventory.
In selecting an inventory valuation method, businesses must consider factors such as tax
implications, financial reporting objectives, and the nature of their inventory costs. The choice
can impact reported profits, taxes, and the balance sheet. There is no one-size-fits-all solution,
and businesses may choose the method that aligns best with their specific needs and industry
norms. Additionally, accounting standards and regulations in a particular jurisdiction may
influence the selection of a preferred method.
11
REFERENCE
To write this project, I have followed guidelines from a few books which are as follows:
• S.P. Jain, K.L. Narang, Simmi Agarwal and Monika Sehgal’s Elements of Cost
Accounting Book by Kalyani Publishers for CHSE Class XII from page II/4.1 to II/4.11.
• Your Article Library – Pricing of Issues of Materials
Link to Website –
https://www.yourarticlelibrary.com/cost-accounting/materials/pricing-of-issues-of-
materials-8-methods/57637
• eGyanKosh – Pricing the Issue of Materials
Link to Website - https://egyankosh.ac.in/bitstream/123456789/71359/1/Unit-5.pdf
• Cost Accounting (+2 2nd year Commerce) Sample papers by Modern’s abc 2024 from
page 33 to 48.
12

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A Project Report on

Name of the Investigator: Tasha Khandelwal

CHSE Roll No: 231KA005

Registration No: KA31C22005

Name of the Institution: MPC Higher Secondary School, Baripada

Name of the examination with year: Annual HS Exam - 2024

Signature of the Student:

Signature of Internal Examiner Signature of External Examiner

FEATURES OF A GOOD METHOD OF MATERIAL ISSUES 1

METHODS OF ISSUE OF MATERIALS 1

2. FIRST IN FIRST OUT (COMMONLY CALLED FIFO) METHOD 2

ADVANTAGES OF FIFO METHOD 2

DISADVANTAGES OF FIFO METHOD 2

3. LAST IN FIRST OUT (COMMONLY CALLED LIFO) METHOD 4

ADVANTAGES OF LIFO METHOD 4

DISADVANTAGES OF LIFO METHOD 4

4. AVERAGE COST METHOD 6

ADVANTAGES OF AVERAGE COST METHOD 6

DISADVANTAGES OF AVERAGE COST METHOD 6

SIMPLE AVERAGE PRICE 6

WEIGHTED AVERAGE PRICE 6

Features of a Good Method of Material Issues

METHODS OF ISSUE OF MATERIALS

Disadvantages of FIFO Method

Stock at the end: 30 units @ ₹ 7.50 = ₹ 225

STORES LEDGER ACCOUNT

Stock at the end: 400 kgs. @ ₹ 20 = ₹ 8000

Advantages of Average Cost Method

Disadvantages of Average Cost Method

(b) Weighted Average Price

STORES LEDGER ACCOUNT

30 Requisition Slip No…. 1200 55.50 66600 750 37600

Stock at the end: 750 units amounting to ₹ 37600.

Workings: Calculation of Simple Average Rate ⸺

(b) Weighted Average Method

STORES LEDGER ACCOUNT

30 Requisition Slip No…. 1200 53.58 64296 750 40204

Stock at the end: 750 units amounting to ₹ 40204.

Workings: Calculation of Weighted Average Rate ⸺

(b) Weighted Average Method

Workings: Calculation of Weighted Average Rate ⸺

STORES LEDGER ACCOUNT

Stock at the end: 200 units @ ₹ 4 = ₹ 800

STORES LEDGER ACCOUNT

Stock at the end: 300 units @ ₹ 3 = ₹ 900

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