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

2. Inventory Costing FIFO First In First Out LIFOLast In First Out W.Avg. Weighted Average

3. 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.

4. 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.

5. 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.

6. Format Perpetual System QtyRateAmountQtyRateAmountQtyRateAmount Date Receipt /Consumption Issue /Sale Balance

7. FIFO QtyRateAmountQtyRateAmountQtyRateAmount 50402,000 2005010,00050 200 40 50 2,000 10,000 50 10 40 50 2,000 500 190509,500 150609,000190 150 50 60 9,500 9,000 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

8. FIFO 100757500190 150 100 50 60 75 9,500 9,000 7,500 15050750040 150 100 50 60 75 2,000 9,000 7,500 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 10,00018,500290

9. LIFO QtyRateAmountQtyRateAmountQtyRateAmount 50402,000 2005010,00050 200 40 50 2,000 10,000 60503,00050 140 40 50 2,000 7,000 150609,00050 140 150 40 50 60 2,000 7,000 9,000 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

10. LIFO 10075750050 140 150 100 40 50 60 75 2,000 7,000 9,000 7,500 100 50 75 60 7500 3,000 50 140 100 40 50 60 2,000 7,000 6,000 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 13,50015,000290

11. W. Avg QtyRateAmountQtyRateAmountQtyRateAmount 50402,000 2005010,0002504812,000 60482,880190489120 150609,0003405318,120 Date Receipt /Consumption Issue /Sale Balance Jan 8 Jan 1 Jan 13 Jan 11

12. W. Avg 1007575004405825,620 150588,7352905816,887 Jan 18 Date Receipt /Consumption Issue /Sale Balance Jan 20 11,61516,887290 Rounded figure in “Rate”

13. Cost Of Inventory FIFO 10,000 LIFO 13,500 W. Avg 11,615

14. Inventory Maintenance System Periodic inventory System or Physical system Does not keeps a continuous record of inventory on hand.

15. 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 1,500 500@1100 1000@1200 1,750,000 Cost of Goods Sold3,000 2,900,000

16. 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 Inventory1,500@900 1,350,000 Cost of Goods Sold3,000 3,300,000

17. 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 1,500@1033 1,549,500 Cost of Goods Sold3,000 3,100,500

18. Inventory Levels Order Level / Reorder level /Reorder point = Maximum Consumption * Lead Time (Maximum)

19. Inventory Levels Maximum Stock Level = Reorder level – (Minimum consumption * Lead time) + EOQ (Minimum)

20. Inventory Levels Minimum Stock Level = Reorder level – (Average consumption * Lead time) (Average)

21. Inventory Levels Danger Level = Average consumption * Emergency time