Cost & Management Accounting Material Costing Lecture-8 Mian Ahmad Farhan (ACA)

Inventory Costing FIFO First In First Out LIFOLast 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 QtyRateAmountQtyRateAmountQtyRateAmount Date Receipt /Consumption Issue /Sale Balance

FIFO QtyRateAmountQtyRateAmountQtyRateAmount 50402, , ,000 10, , , , ,500 9,000 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

FIFO ,500 9,000 7, ,000 9,000 7,500 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 10,00018,500290

LIFO QtyRateAmountQtyRateAmountQtyRateAmount 50402, , ,000 10, , ,000 7, , ,000 7,000 9,000 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

LIFO ,000 7,000 9,000 7, , ,000 7,000 6,000 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 13,50015,000290

W. Avg QtyRateAmountQtyRateAmountQtyRateAmount 50402, , , , , ,120 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

W. Avg , , ,887 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 11,61516, 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 UnitsPer UnitCost Beginning Inventory1,500 Rs. 900Rs. 1,350,000 Purchase 11,000 1,000,000 Purchase 21,000 1,100 1,100,000 Purchase 31,000 1,200 1,200,000 Available for Sale4,500 4,650,000 Sales3,000 Ending Inventory 1,500 1,750,000 Cost of Goods Sold3,000 2,900,000

Example LIFO Under Periodic System UnitsPer UnitCost Beginning Inventory1,500 Rs. 900Rs. 1,350,000 Purchase 11,000 1,000,000 Purchase 21,000 1,100 1,100,000 Purchase 31,000 1,200 1,200,000 Available for Sale4,500 4,650,000 Sales3,000 Ending 1,350,000 Cost of Goods Sold3,000 3,300,000

Example W.A Under Periodic System UnitsPer UnitCost Beginning Inventory1,500 Rs. 900 Rs. 1,350,000 Purchase 11,000 1,000,000 Purchase 21,000 1,100 1,100,000 Purchase 31,000 1,200 1,200,000 Available for Sale4,500 4,650,000 Average = $4,650,000/ 4,500= 1033 Sales3,000 Ending Inventory 1,549,500 Cost of Goods Sold3,000 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