This document discusses inventory valuation and various methods for pricing material issues. It describes the objectives of inventory valuation as ascertaining purchase price, calculating cost of goods issued, and arriving at closing inventory value for financial statements. Various cost price methods are outlined including FIFO, LIFO, specific price, and base stock. Average price methods like simple average, weighted average, and moving averages are also covered. The document concludes with descriptions of notional price methods such as standard price, inflated price, and replacement price.

1. U.KALPANADEVI II- MBA
MICHAEL INSTITUTE OF MANAGEMENT

2. INVENTORY:

 The inventory includes rawmaterials, stores,
supplies, spareparts, tools, components, assemblies
partly finished goods and finished goods.
 The objective of inventory control is to achieve
maximum possible inventory turnover.

3. Objectives of Inventory
Valuation

 1. To ascertain the correct purchase price
 2. To calculate the cost of goods issued to
production
 3. To arrive at the closing inventory value. This
significantly influences the gross profit or gross
loss shown by Trading account.
 4. To arrive at the correct financial position of the
organisation by including the closing inventory
value in the Balance Sheet.

4. Steps involved in Inventory Valuation

 Step1: Physical counting and measurement
of stock
 Step2: Ascertainment of cost and market
price for each item in stock
 Step3: Valuing the inventory at cost or net
realizable value whichever is less.

5. METHODS OF PRICING
MATERIAL ISSUES

Cost Price Methods:
a) First in First out (FIFO)
b) Last in last out (LIFO)
c) Specific price
d) Base stock
e) Highest in first out (HIFO)

6. Desired from cost prices / Average
Price methods

f) Simple average
g) Weighted Average
h)Periodic Simple Average
i)Periodic Weighted Average
j)Moving Simple Average
k)Moving Weighted Average

7. Notional Price Methods:

l) Standard Price
m) Inflated Price
n) Re-use Price
o) Replacement Price

8. First-In-First-Out [FIFO]:

 Under this method, materials received first are
issued first.
 When the first lot of materials purchased is
exhausted the next lot is taken up for issue.
 It works on the presumption that old stock should
be used first, and when it gets exhausted, new stock
should be used.
 As a result, value of closing stock will be at the latest
purchase price.

9. Last- In-First-Out [LIFO]:

 This is quite opposite to FIFO method. Here,
materials received last are issued first.
 Under this method, materials issued to production
will be charged at the latest price.
 But closing stock will be valued at old price.
 Thus, closing stock under this method will be
understated

10. Highest In First Out [HIFO]:

Under this method, highest priced materials in
stock are issued first.
When such stock gets exhausted, next highest
priced materials are issued.
 This operates on the premises that consumption
should be at the highest
price while inventory should be valued at lowest
possible price.

11. Base Stock Method

 Any organisation will always maintain a minimum
quantity of materials in stock.
 Such minimum quantity is called base stock.
 It is created out of the first lot purchased and is
constantly valued at that price and carried
forward.
 Quantity in excess of such base stock is issued and
priced at FIFO or LIFO method.

12. Specific Price Method

 This is used when materials are procured for a
specific job.
 Such materials, when received are earmarked for
that specific job for which purchased, and are issued
to that particular job when requisition comes.

13. Simple Average Price Method

Here the issue price is arrived at by dividing the
sum of rates of different materials in stock [from
which materials could have been issued] by the
number of rates used in numerator.
 For physical issue of materials, FIFO method is
used.

14. Weighted Average Price Method

This operates on the premises that when once
materials received are binned, they lose their
individual identity.
So, the issue price is arrived as follows:
Issue price = Total value of materials in stock /
Total quantity in stock

15. Replacement Price Method:
Under this method, the materials

issued are valued at a price at which they
can be replaced.
 Inflated Price Method:
Here the issues are priced at
purchase price plus losses due to
contingencies like evaporation, wastage
in handling and storing, carrying costs,
etc.

16. Standard Price Method

Under this method, for each type of material, a
standard issue price is worked out, and all the
issues made are priced at such standard price.
 Any difference between the standard price and
actual price, results in material price variance.
If the actual price exceeds the standard, it is called
unfavorable price variance.
 On the other hand, if the actual price is less than the
standard price, it leads to favorable price variance.

17. 
THANK YOU