Methods of Pricing Inventory

Presented By:
Manas Maheshwari(MBA/10094/18)
Content

 What is inventory
 Objectives
 Steps in valuation
 Standard Format
 Methods
 Comparison
 What is inventory ?
• Inventories as assets which are:
a. held for sale in the ordinary course of business,
b. in the process of production for such sale, or
c. in the form of materials or supplies to be consumed in
the production process or rendering of services.
• Finished Goods, WIP, Raw materials, Maintenance
suppliers, Consumables and loose tools.
 Objective of Inventory
valuation
 To ascertain the correct purchase price.
 To calculate the cost of goods issued to production .
 To arrive at the closing inventory value. This
significantly influences the gross profit or gross
loss shown by Trading account.
 To arrive at the correct financial position of the
organization by including the closing inventory
value in the Balance Sheet.
 Steps involved in Inventory
Valuation
 Step1: Physical counting and measurement of
stock.
 Step2: Ascertainment of cost and market price for
each item in stock.
 Step3: Valuing the inventory at cost or net
realizable value whichever is less.
 METHODS OF PRICING
MATERIAL ISSUES
Cost Price Methods:
a) First in First out (FIFO)
b) Last in last out (LIFO)
c) Specific price
d) Average Weighted Method
First-In-First-Out [FIFO]

 Under this method, materials received first are

issued first.
 When the first lot of materials purchased is
exhausted the next lot is taken up for issue.
 It works on the presumption that old stock should
be used first, and when it gets exhausted, new
stock should be used.
 As a result, value of closing stock will be at the
latest purchase price.
 Illustration

Bike LTD purchased 10 bikes during January and

sold 6 bikes, details of which are as follows:
1. January 1 Purchased 5 bikes @ ₹5000 each
2. January 5 Sold 2 bikes
3. January 10 Sold 1 bike
4. January 15 Purchased 5 bikes @ ₹7000 each
5. January 25 Sold 3 bikes
 Solution
Date Purchase Sales Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt

1 Jan 5 5000 25000 - - 5 5000 25000

5 Jan - - - 2 5000 10000 3 5000 15000

10 Jan - - - 1 5000 5000 2 5000 10000

15 Jan 5 7000 35000 - - - 2 5000 10000

5 7000 35000
25 Jan - - - 2 5000 10000 4 7000 28000
1 7000 70000

Total 4 7000 28000

Last- In-First-Out [LIFO]

 This is quite opposite to FIFO method. Here,

materials received last are issued first.
 Under this method, materials issued to production
will be charged at the latest price.
 But closing stock will be valued at old price.
 Thus, closing stock under this method will be
understated
 Illustration

Bike LTD purchased 10 bikes during January and

sold 6 bikes, details of which are as follows:
1. January 1 Purchased 5 bikes @ ₹5000 each
2. January 5 Sold 2 bikes
3. January 10 Sold 1 bike
4. January 15 Purchased 5 bikes @ ₹7000 each
5. January 25 Sold 3 bikes
 Solution (LIFO)
Date Purchase Sales Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt

1 Jan 5 5000 25000 - - 5 5000 25000

5 Jan - - - 2 5000 10000 3 5000 15000

10 Jan - - - 1 5000 5000 2 5000 10000

15 Jan 5 7000 35000 - - - 2 5000 10000

5 7000 35000
25 Jan - - - 3 7000 21000 2 5000 10000
2 7000 14000

Total 2 5000 10000

2 7000 14000
Specific Price Method

 This is used when materials are procured for a

specific job.
 Such materials, when received are earmarked for
that specific job for which purchased, and are
issued to that particular job when requisition
comes.
Weighted Average Price
Method
 This operates on the premises that when once
materials received are binned, they lose their
individual identity.
 So, the issue price is arrived as follows:
 Issue price = Total value of materials in stock /
Total quantity in stock
 Solution
Date Purchase Sales Balance
Qty Rate Amt Qty Rate Amt Qty Rate Amt

1 Jan 5 5000 25000 - - 5 5000 25000

5 Jan - - - 2 5000 10000 3 5000 15000

10 Jan - - - 1 5000 5000 2 5000 10000

15 Jan 5 7000 35000 - - - 2 5000 10000

5 7000 35000
----- ------- ----------
7 6428. 45000
5
25 Jan - - - 3 6428. 19285. 4 6428. 25714.
5 5 5 5

Total 4 6428. 25714.

5 5
 Comparison of Alternative
Methods During Fluctuation of
Prices
Direction of Ending Cost of Goods Gross Profit
Price Change Inventory Sold Increasing

Increasing FIFO>WAC> LIFO>WAC> FIFO>WAC>

LIFO FIFO LIFO

Constant FIFO=WAC= FIFO=WAC= FIFO=WAC=

LIFO LIFO LIFO

Decreasing LIFO>WAC> FIFO>WAC> LIFO>WAC>

FIFO LIFO FIFO
THANK YOU