Page 107 - DCOM202_COST_ACCOUNTING_I

Unit 5: Methods of Valuing Material Issues

Notes

Task Two materials X and Y are used as follows:

Normal usage 50 per week each
Maximum usage 75 per week each
Minimum usage 25 per week each
Reorder quantity: X = 300; Y = 500
Reorder period : X = 4 to 6 weeks, Y = 2 to 4 weeks

Calculate for each material:
(a) Reordering price,
(b) Minimum level,
(c) Maximum level, and
(d) Average stock levels.

Self Assessment

State whether the following statements are true or false:
1. The basic purpose of inventory control is to maintain optimum level of inventory.
2. FIFO method is based on the assumption that the units which are acquired first are issued
first.
3. FIFO uses the price of the last batch received for all issues until all units from this batch
have been issued.
4. Issues are always priced at lower prices and the closing stock is, therefore, valued at the
lowest possible price.
5. LIFO is the reverse of the FIFO method.
6. FIFO is cumbersome and shows out of date figures in the balance sheet.

7. Under NIFO method, issues are priced at the price at which order for material has been
placed but not yet received.
8. LIFO is very suitable in fluctuating market.
9. Simple Average method does not attach any importance to the quantity in each
consignment.
10. Simple Average Method is comparatively difficult to compute the issue price.
11. After all the units in the highest priced lot of material are issued, the next highest priced
batch of material in stock is issued.
Fill in the blanks:
12. Under ………………… issues are made out of highest priced batch of material.
13. Any number of issues can be priced at the ………………… until the receipt of a new
consignment which necessitates the calculation of issue price afresh.

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