Managing Inventories

Operating Cycle

Cash Material

Sales WIP

Finished
Goods
 Inventory

Valuation

Perpetual
Periodic
Inventory
 Inventory
Valuation

Specific First in First Last in First Weighted

Identification Out Out Average Cost
• Specific Identification: It is particularly suited
for inventories of high value , low volume
items

• The method is very costly to implement if

volume is high
 Date   Units Unit Cost Total Cost

1-Jan Beginning Inventory 100 2 200

27-Mar Purchases 100 3 300

12-Jun Purchases 100 4 400

19-Sep Purchases 100 5 500

30-Nov Purchases 100 6 600

  Available for Sale 500   2000

  Sales 350    

  Ending Inventory 150    

Sales Price @ Rs 10/ per unit

• FIFO
Closing Inventory: 50units @ Rs 5 Rs 250
100unit @ Rs 6 Rs 600
Rs 850

• LIFO
Closing Inventory
100 units @ Rs 2 Rs 200
50 units @ Rs 3 Rs 150
Rs 350

• Weighted Average Cost

Cost of Goods Sold Available for Sale Rs 2000
No. of Units Available for Sale 500
Weighted Average Unit Cost Rs 4

• Closing Inventory 150 units @Rs 4 Rs 600

• Weighted average price per u = [ p1q1 + p2q2 + p3q3 ] / q1+q2+q3
 Prices Ending Inventory Cost of Goods Sold Gross Profit

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

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

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

 Net Realizable value
• The estimated Selling price in the ordinary
course of business less the estimated costs of
completion and the cost necessary to make
the sale
 Lower Cost to Market Method

Cost (Rs) Market Item by Group

(Rs) Item
Group I
Item 470 1,400 1,350 1350
482 1,800 1,970 1800
612 5,400 6,500 5400
8500
Group II
Item 276 1,290 1,150 1150
782 1,450 1,450 1450
891 1,050 1,350 1050 3650

Using LCM method compute the value of closing inventory through (a)
each item of inventory (b) group of similar items wise.
 Cost per Unit (Rs) Price per Unit (Rs)
Group I
A1 450 480
A2 530 670
A3 480 520
Group II
C1 720 760
C2 680 740
C3 610 780

Sales commission is payable on all items at 10 percent in Product Group I and

20 percent in Product Group II . Delivery charges of Rs 20 per unit are payable
on Product Group I and Rs 50 on Product Group II except for product C3.
Compute the amount at which ending inventory is to be reported applying LCM
principle to each item of inventory .
 Lower Cost to Market
  Cost per Price per
Unit Unit (Rs)
(Rs) LCM
Selling Cost(Rs) NRV(Rs) (Rs)
Group I    
Sales
Commission(Rs) Delivery Charges (Rs)    
A1 450 480
45 20 415 415
A2 530 670
53 20 597 530
A3 480 520
48 20 452 452
            1397
Group II    
       
C1 720 760
144 50 566 566
C2 680 740
136 50 554 554
C3 610 780
122 0 658 610
            1730