Material Cost: Stores Ledger

and Inventory Valuation

Methods
Effectively managing material costs is critical for businesses to maintain
profitability and control expenses. The stores ledger, which tracks the movement
and value of inventory, plays a crucial role in this process. Additionally, there are
several inventory valuation methods that businesses can employ to determine the
cost of materials used or sold. This presentation will explore the stores ledger and
delve into the key inventory valuation techniques of FIFO, LIFO, weighted
average, and simple average.

by NILA
A
FIFO (First-In, First-Out)
Explanation
The FIFO method assumes that the earliest
goods purchased or produced are the first
to be sold or used in production. This
means that the cost of the earliest inventory
items is matched against the revenue
generated from their sale, resulting in a
more accurate representation of current
costs.
Benefits
FIFO provides a more realistic valuation of
ending inventory, as it reflects the current
market prices. It also results in a smoother
profit and loss statement, as the cost of
goods sold more closely matches the
revenue generated from those sales.

Limitations
In times of rising prices, FIFO can result in a higher cost of goods sold, which can lead to a
lower reported profit. Additionally, FIFO may not accurately reflect the true cost of production
or replacement cost of inventory.
LIFO (Last-In, First-Out)
Explanation
The LIFO method assumes that the most
recently purchased or produced items are
the first to be sold or used in production.
This means that the cost of the latest
inventory items is matched against the
revenue generated from their sale.
Benefits
LIFO can provide a more realistic
representation of current costs, as it
matches the most recent prices against
revenue. This can be beneficial in times of
rising prices, as it results in a lower cost of
goods sold and a higher reported profit.

Limitations
LIFO can lead to a lower valuation of ending inventory, as it reflects the cost of the oldest
inventory items. This can result in a less accurate representation of the true value of the
business's assets.
Weighted Average Method
Explanation
The weighted average method
calculates the cost of goods
sold and the value of ending
inventory by using a weighted
average cost per unit. This is
done by dividing the total cost
of goods available for sale by
the total number of units
available for sale.
Benefits
The weighted average method
provides a balance between
the FIFO and LIFO methods,
as it smooths out the impact of
price fluctuations. It also
simplifies inventory
management, as the cost per
unit is constantly updated
based on new purchases.
Limitations
The weighted average method
may not accurately reflect the
true cost of the most recent
purchases, as it blends the cost
of all items in the inventory.
This can lead to a less
accurate representation of
current costs and profit
margins.
Simple Average Method

1 Explanation 2 Benefits
The simple average method calculates The simple average method is easy to
the cost of goods sold and the value of understand and implement, making it a
ending inventory by taking the average popular choice for small businesses or
cost of all items in the inventory, those with limited resources. It also
regardless of when they were purchased. provides a relatively stable cost per unit,
which can be beneficial for budgeting
and forecasting purposes.
3 Limitations
The simple average method does not take into account the actual timing of purchases, which
can lead to a less accurate representation of current costs and profit margins, especially in
times of significant price fluctuations.