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PRESENTATION ON: INVENTORY
VALUATION METHODS
PRESENTED TO: PRESENTED BY:
MS NIDHI WALIA MANDEEP KAUR
MBA-2 (2113)
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FIRST IN FIRST OUT (FIFO)
Under this method, material is first issued fromthe earliest consignment on hand and priced atthe cost at which that consignment was placed
in the stores. The units in the opening stock of materials are
treated as if they are issued first, the units fromthe first purchase issued next, so on until theunits left in the closing stock of materials arevalued at the latest cost of purchases.
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ADVANTAGES OF FIFO
METHOD
It is simple to understand and easy to operate.
This method covers the cost price of the
materials.
This method is useful when prices are falling.
Closing stock of materials will be valued at the
market price as the closing stock under thismethod would consist of recent purchase of
materials.
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DISADVANTAGES OF FIFO
METHOD
This method increases the possibility of
clerical errors, if consignments are received
frequently at fluctuating prices as every time
an issue of materials is made, the store ledger
clerk will have to go through his record to
ascertain the price to be charged.
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LAST IN FIRST OUT (LIFO)
This method is also known as replacement cost
method. Under this method last received
materials are issued first & ending inventory
consists of earlier acquired materials.
In this last purchased goods will correspond to
the current market prices except that goods
were not purchased much earlier.
The inventories will be valued at oldest lots on
hand.
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HIGHEST IN FIRST
OUT(HIFO)
This method is based on the assumption that the
closing stock of materials should always remain
at the minimum value so the issues are priced at
the highest value of the available consignmentsin the store. The method is not popular as it
always undervalues the stock which amounts to
creating a secret reserve. The method is mainlyused in case of cost plus contracts or monopoly
products as it is helpful in increasing the price of
the contract or products.
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ADVANTAGES
This method is suitable in rising prices because
goods will be issued from the latest received
lots at prices which are closely related to
current market prices. The current cost will
also be matched to current income.
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DISADVANTAGES
This method is able to show lower profits
because of increased charge to production &
closing stock figures will also be low as they
will be valued at earlier prices.
The taxable liability will also be low thus
enabling the concern to retain more money in
the business.
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AVERAGE COST METHOD
In this method of pricing all materials in stock
are so mixed that a price based on all lots is
formed. This cost may be of two types:
Simple average cost
Weighted average cost
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SIMPLE AVERAGE COST
In this method the prices of all lots in stock are
averaged & the materials are issued on that
average price.
WEIGHTED AVERAGE COST METHOD
In this method the total cost of all the materials
is divided by the total number of items in
stock. The price calculated in this way will be
used for issue of materials upto the time a
fresh purchase has not been made.
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After a fresh purchase, quantity will be added
to the earlier balance quantity & material cost
will be added to the earlier cost. A fresh price
is calculated by dividing the changed total cost
by the number of units in stock after the
purchase . A new price is calculated where
even a fresh purchase is made.
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BASE STOCK METHOD
Under this method some quantity of materials
is assumed to be necessary for keeping the
concern going on. The quantity is not issued
unless otherwise there is an emergency. This
material which is not issued as it kept in stock
is known as a base stock. The earlier materials
received are kept as a base & are valued at aprice on which they were acquired.
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CONT..
Not an independent method.
It is used along with some other methods such
as FIFO, LIFO. After maintaining the base
quantity in stock, the issues are priced at one
of the methods mentioned above. The purpose
of this method is too issue materials at current
price.
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STANDARD PRICE METHOD
The issue price of materials is predetermined
or estimated in this method. The standard price
is based on market conditions, usage rate,
handling facilities, storage facilities. There will
be a difference between the cost of materials &
price charged to production. The difference
between these two prices will be transferred topurchase price variance account.
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MARKET PRICE METHOD