Materials which are issued against stores requisition, before such issues are to be entered in the stores ledger & a job or a service are charged, are required to be priced by the cost department. For pricing the issues, there are different methods:
- (A) Specific Cost Method:
Material which is issued is priced at the exact cost of the said material, under this method. It is required to obtain the identity of material as well its corresponding price. This method is suitable when for a job; any material is specially purchased & issued to it. Thus, this method can be applied in job costing where purchases of non-standard materials are made & these are stored in separate lots.
- Appropriate material cost which is chargeable to a job or service is given by the method.
- In job costing, where purchases of non-standard materials are made, this method is suitable, as in separate lots the materials are kept & then issued.
- The identification of the material of a particular purchase & its corresponding cost when the purchases are numerous is difficult under this method.
- For the purpose of identification, standard materials which are purchased in separate lots are usually not kept in separate places. The cost of storage space shall be higher, if, for proper identification that is done.
1(B)(i) First-in-First out (FIFO) Method:
Under this method, assumption is made, for the purpose of pricing the issues, that the materials which are received first shall be issued first & at the corresponding costs the charges are made. In other words, in the order of receipts, the issues take place. Here the identity of the material is immaterial. Physically, in fact, the materials which are received last may be issued first, i.e. in case the materials are placed in heaps, the materials from the bottom cannot be expected to be issued first. However, as per assumption, in FIFO, the earlier purchases shall be exhausted earlier & the stock will represent later purchases. Thus, in a condition of falling prices, the production will consume higher costs & the replacement cost will be lower. In the condition of rising prices, the opposite shall happen.
- At cost, the materials shall be charged. Thus, between the total cost & the total charges, no difference will be there.
- Better result is provided by the method, in the conditions of falling prices.
- With the market price, more or less the value of closing stock will correspond.
- In both theory & practice, the method is simple.
- In the conditions of rising prices, it is proved by the method that the production will consume lower costs & the closing stock will represent higher costs. Thus more money will involve in replacement of stock.
- Clerical errors in pricing may go up in case of large number of purchases.
- On the basis of stock available, at different rates, two jobs may be charged. So the comparison of costs will give misleading results.
Using FIFO method of pricing the issues of stores, prepare a stores ledger, using the following information:
March 1 Balance in hand @ $ 4 1000
4 Issued 600
5 Received @ $ 4.5 800
9 Issued 400
16 Issued 100
23 Received @ $ 5.00 400
28 Issued 300
30 Received @ $ 4.80 100
31 Issued 600
Solution: Stores Ledger Card (FIFO Method)
1(B)(ii) Last-in-First out (LIFO) Method:
This method is similar to FIFO, with the exception that under this method, assumption is made, for the purpose of pricing the issues, that the materials which are received last shall be issued first. Here also the identity of the material is not required. Physically, according to the convenience, any purchase may be issued first. However, for the purpose of pricing, the assumption is that, the latest purchases are issued first. Under this method, in the conditions of rising prices, the charge to production will be more or less at current market price while the earlier low prices will be represented by the stock.
- More or less the current market prices will be represented by the cost of material.
- High charge to production is created by the method, in conditions of rising prices. As a result, additional money will not be required for the replacement of stock.
- The earlier low prices will be represented by the closing stock & hence, in financial accounting, no unrealised profit will be there.
- Where, during periods of changing price levels, the profits fluctuate, the method will give better results.
- Both in theory & practice, the method is simple.
Between the total cost incurred & the total charges made, there will be no difference.
- The method will mean lower charge to production & hence higher value of closing stock, in the conditions of falling prices.
- Where there is large number of purchases, in pricing, the clerical error may go up.
- On the basis of stock available, at different rates, two jobs may be charged. Thus any comparison of costs will be unreliable.
- The value of closing stock, in conditions of rising prices, shall not have any influence of the current market conditions on it.
Under the LIFO method of pricing the issues of store, prepare a stores ledger, using the following information:
Jan. 01 Balance in hand @ $ 3.30 per unit 300
02 Received @ $ 3.60 per unit 600
10 Issued 450
14 Received @ $ 3.90 per unit 300
18 Issued 450
23 Returned from the issues on 10th Jan 60
26 Received @ $ 3.60 per unit 300
30 Wastage 30
31 Issued 330
Solution: Stores Ledger Card (LIFO Method)
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- Accounting for Materials
- ABC System/Selective Control System
- Average Cost Methods
- Centralized vs Decentralized Purchase
- Comparison of FIFO& LIFO methods, Next-in-First out (NIFO) Method
- Economic order Quantity (EOQ)
- General Accounting Entries for Materials
- Levels of Stock
- Material Control
- Materials receipt & checking, Constituents of Material Cost
- Periodic Simple Average Method, Periodic Weighted Average Method
- Perpetual Inventory system
- Purchase Procedure
- Standard Price Method
- Stock Valuation
- Types of Stores