PRM 39 FAC

FIFO-Weighted Average
Different Methods of Issue and Valuation of Stock
First In First Out (FIFO)
First In First Out is also known as FIFO. Under this method,
the pricing of issue is based on an assumption made that
the oldest stock is issued first. Therefore at the time of
issue, the rate pertaining to that will be applied until the
whole lot is exhausted.
From the following particulars, prepare the Stores Ledger
Account showing how the value of the issues would be
recorded under FIFO methods.
01-12-2009 Opening Stock 1,000 Units at Rs. 26 each
10-12-2009 Purchased 1,500 Units at Rs. 24 each
12-12-2009 Issued 1,100 Units
15-12-2009 Purchased 1,000 Units at Rs.25 each
17-12-2009 Issued 500 Units
28-12-2009 Issued 300 Units

2
 FIFO Method
Date Purchase Issue Balance
Quantity Rate Value Quantity Rate Value Quantity Rate Value

01-12- 1000 26 26000 -- -- -- 1000 26 26000

2009
10-12- 1500 24 36000 -- -- -- 1000 26 26000
2009
1500 24 36000

12-12- -- -- -- 1000 26 26000

2009
100 24 2400 1400 24 33600

15-12- 1000 25 25000 -- -- -- 1400 24 33600

2009
1000 25 25000

17-12- -- -- -- 500 24 12000 900 24 21600

2009
1000 25 25000

28-12- -- -- -- 300 24 7200 600 24 14400

2009
1000 25 25000
3
Weighted Average Method
• Under this method, the price of materials issue is
determined by dividing the total cost of materials
in stock by the total quantity of material in stock.
Here weighted average rate is calculated based on
both quantity and price of the materials in stock.
As more issues are made, a new average rate is
computed and this average rate is applied to the
subsequent issues. The material issue price is
calculated by the formula given below:

4
Value as per Weighted Average Method
Date Purchase Issue Balance
Quantity Rate Value Quantity Rate Value Quantity Rate Value

01-12- 1000 26 26000 -- -- -- 1000 26 26000

2009

10-12- 1500 24 36000 -- -- -- 2500 *24.8 62000

2009

12-12- -- -- -- 1100 24.8 27280 1400 24.8 34720

2009

15-12- 1000 25 25000 -- -- -- 2400 24.88 59720

2009

17-12- -- -- -- 500 24.88 12440 1900 24.88 47280

2009

28-12- -- -- -- 300 24.88 7465 1600 24.88 39815

2009
5
Different method of depreciation
 Difference in profit due to method of Depreciation

A company has purchased a machine on 1-4-2006. The cost was Rs.11,00,000 and Rs.1,00,000
will be residual value. Its useful life is 10 years. Find out the difference in depreciation amount by
using two different methods for the year 2007-08.

Amount in Million
Straight Line Method Reducing
Balance Method
1-4-2006 Cost 11,00,000 11,00,000
Residual Value - 1,00,000
Amount to be written within ten years 10,00,000 11,00,000
Depreciation for the year 2006-07 1,00,000 1,10,000
WDV on 1-4-2007 9,00,000 9,90,000
Depreciation for the year 2007-08 1,00,000 DIFFERENCE 99,000

This difference Rs.1000 will affect the income statement.

The company which uses straight line method can show lower profit by Rs.1000 than the
other company which uses reducing balance method.