Valuation of Inventories: by Surbhi Khandelwal (26) Pooja Raut (42) Zeenal Shah (54) Rashmi Sinha
Valuation of Inventories: by Surbhi Khandelwal (26) Pooja Raut (42) Zeenal Shah (54) Rashmi Sinha
Valuation of Inventories: by Surbhi Khandelwal (26) Pooja Raut (42) Zeenal Shah (54) Rashmi Sinha
By
SURBHI KHANDELWAL(26)
POOJA RAUT(42)
ZEENAL SHAH(54)
RASHMI SINHA(60)
• To formulate the method of computation of
cost of inventories
• Raw material
• Work in Progress
• Stores
• Spares - ASI
Financial instruments
Valued at lower of
COST
or
Net Realizable Value.
Total inventory cost
Purchase price
Freight Inwards
• trade discount
• rebate
• duty drawback
Direct labour
By product
NRV is deducted from cost of conversion
Administration costs
Abnormal wastage
Storage costs
Perpetual System
Actual physical count at a particular date
Disadvantages of FIFO
• In case of rising prices, income tax liability is increased
• In a period of fluctuating prices, the cost of issue do not
represent current market prices
• Involves a lot of calculation work
Date Receipts Issues Balance
Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs)
05.01.2001 - - - 50 1.5 75
Rs
A Opening Inventory 100
B Purchases: (Rs 600 + Rs 1030) 1630
C Cost of Goods Sold (Rs 100 + Rs 525 + Rs 75 + Rs 515) 1215
D Ending Inventory (A+B-C) 515
LAST IN LAST OUT (LIFO)
Disadvantage of LIFO
Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs) Quantity Rate (Rs) Amount (Rs)
50 1 50 50 1 50
Rs
A Opening Inventory 100
B Purchases: (Rs 600 + Rs 1030) 1630
C Cost of Goods Sold (Rs 100 + Rs 525 + Rs 75 + Rs 515) 1268
D Ending Inventory (A+B-C) 462
SPECIFIC IDENTIFICATION
METHOD
• Requires a detailed physical account so as to
know exactly how many of each goods bought
on specific dates remained at year end
inventories
• Relates the ending inventory goods directly to
the specific price at which they were bought
for
• Allows management to easily manipulate the
ending inventory cost since they can report
that the cheaper goods were sold first, hence
increasing ending inventory cost and lowering
COGS
• Very hard to use on interchangeable goods
Weighted Average Price Method
• W = ____Total cost of goods in stock_____
Total quantity of goods in stock
Advantages:
1. It averages out the effect of price fluctuations.
2. Compared to FIFO or LIFO, this method is simpler.
Disadvantages:
1.This method involves more calculations as weighted average
price needs to be calculated on the receipt of new lot.
2. The value of closing stock may not be close to market value
Adjusted Selling Price (or Retail
Inventory Method)
• Often used in retail trade for measuring
inventories of large numbers of rapidly
changing items that have similar margins.
• Cost of inventory = Sales value – appropriate
% gross margin.
• An average percentage is generally used.
Standard cost Method
• A standard cost is set for each material and this
cost is used as a basis for pricing the material
issues.
• This method is often used to arrive at historical
cost for the purpose of inventory valuation.
• Advantages:
1. It is easy to operate
2. There is a reduction in clerical work as repeated
cost calculations are not required to be made on
the receipt of each new lot of materials.
• Disadvantages:
1. The cost of issues of materials and closing
stock do not reflect the current market prices.
2. the determination of standard cost becomes
very difficult when prices fluctuate frequently.
Net Realizable Value = Estimated - Estimated Costs
(NRV) Selling necessary to make
Price sale
Cost