Cost & Management

Accounting

Material Costing
Lecture-8
Mian Ahmad Farhan (ACA)
Inventory Costing

FIFO First In First Out

LIFO Last In First Out

W.Avg. Weighted Average

 FIFO Features

 FIFO gives us a better indication of the value of

ending inventory

 It also increases net income because inventory

that might be several years old is used to value
the cost of goods sold.

 Increasing net income sounds good, but

remember that it also has the potential to
increase the amount of taxes that a company
must pay.
 LIFO Features

 LIFO isn't a good indicator of ending inventory value because

the left over inventory might be extremely old and, perhaps,
obsolete.

 LIFO results in a valuation that is much lower than today's

prices. LIFO results in lower net income because cost of
goods sold is higher.
 W. Avg Features

 It takes the weighted average of all units available for sale

during the accounting period

 Average cost produces results that fall somewhere

between FIFO and LIFO.
 Format Perpetual System

Date Receipt /Consumption Issue /Sale Balance

Qty Rate Amount Qty Rate Amount Qty Rate Amount

 FIFO

Date Receipt /Consumption Issue /Sale Balance

Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 1 50 40 2,000

200 50 10,000 50 40 2,000

Jan 8
200 50 10,000
50 40 2,000 190 50 9,500
Jan 11
10 50 500

Jan 13 150 60 9,000 190 50 9,500

150 60 9,000
 FIFO

Date Receipt /Consumption Issue /Sale Balance

Jan 18 100 75 7500 190 50 9,500

150 60 9,000
100 75 7,500
150 50 7500 40 50 2,000
Jan 20 150 60 9,000
100 75 7,500
10,000 290 18,500
 LIFO

Date Receipt /Consumption Issue /Sale Balance

Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 1 50 40 2,000

200 50 10,000 50 40 2,000

Jan 8
200 50 10,000
60 50 3,000 50 40 2,000
Jan 11
140 50 7,000

Jan 13 150 60 9,000 50 40 2,000

140 50 7,000
150 60 9,000
 LIFO

Date Receipt /Consumption Issue /Sale Balance

Jan 18 100 75 7500 50 40 2,000

140 50 7,000
150 60 9,000
100 75 7,500
Jan 20 100 75 7500 50 40 2,000
50 60 3,000 140 50 7,000
100 60 6,000
13,500 290 15,000
 W. Avg

Date Receipt /Consumption Issue /Sale Balance

Qty Rate Amount Qty Rate Amount Qty Rate Amount

Jan 1 50 40 2,000

200 50 10,000 250 48 12,000

Jan 8
60 48 2,880 190 48 9120
Jan 11
150 60 9,000 340 53 18,120
Jan 13
 W. Avg

Date Receipt /Consumption Issue /Sale Balance

Jan 18 100 75 7500 440 58 25,620

150 58 8,735 290 58 16,887

Jan 20

11,615 290 16,887

Rounded figure in “Rate”

Cost Of Inventory
FIFO 10,000
LIFO 13,500
W. Avg 11,615
 Inventory Maintenance System

Periodic inventory System or Physical system

Does not keeps a continuous record of inventory on

hand.
 Example FIFO Under Periodic System

Units Per Unit Cost

Beginning Inventory 1,500 Rs. 900 Rs. 1,350,000
Purchase 1 1,000 1,000 1,000,000
Purchase 2 1,000 1,100 1,100,000
Purchase 3 1,000 1,200 1,200,000
Available for Sale 4,500 4,650,000
Sales 3,000
Ending Inventory 1,500 500@1100 1,750,000
1000@1200
Cost of Goods Sold 3,000 2,900,000
 Example LIFO Under Periodic System

Units Per Unit Cost

Beginning Inventory 1,500 Rs. 900 Rs. 1,350,000
Purchase 1 1,000 1,000 1,000,000
Purchase 2 1,000 1,100 1,100,000
Purchase 3 1,000 1,200 1,200,000
Available for Sale 4,500 4,650,000
Sales 3,000
Ending Inventory 1,500@900 1,350,000

Cost of Goods Sold 3,000 3,300,000

 Example W.A Under Periodic System

Units Per Unit Cost

Beginning Inventory 1,500 Rs. 900 Rs. 1,350,000
Purchase 1 1,000 1,000 1,000,000
Purchase 2 1,000 1,100 1,100,000
Purchase 3 1,000 1,200 1,200,000
Available for Sale 4,500 4,650,000

Average = $4,650,000/ 4,500 = 1033

Sales 3,000
Ending Inventory 1,500@1033 1,549,500

Cost of Goods Sold 3,000 3,100,500

 Inventory Levels

Order Level / Reorder level /Reorder point

= Maximum Consumption * Lead Time (Maximum)

 Inventory Levels

Maximum Stock Level

= Reorder level – (Minimum consumption * Lead time) + EOQ
(Minimum)
 Inventory Levels

Minimum Stock Level

= Reorder level – (Average consumption * Lead time)
(Average)
 Inventory Levels

Danger Level
= Average consumption * Emergency time