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Gopika Juneja, Lovely Professional University Unit 5: Methods of Valuing Material Issues

Unit 5: Methods of Valuing Material Issues Notes

CONTENTS

Objectives
Introduction
5.1 First-in-First-out Method (FIFO)
5.2 Last-in-First-out Method (LIFO)
5.3 Highest-in-First-out (HIFO)
5.4 Next-in-First-out (NIFO)

5.5 Simple Average Method
5.6 Weighted Average price Method
5.7 Replacement or Market Price Method
5.8 Summary

5.9 Keywords
5.10 Review Questions
5.11 Further Readings

Objectives

After studying this unit, you will be able to:

z z Identify the various pricing methods;
z z Understand the weighted Average Method;
z z Know about the replacement and market price method.

Introduction

The success of any industry or enterprise depends, to a greater extent, upon the successful control
of inventory. Further, this input provides a number of avenues and wide scope for improvement
of overall performance of the industry. Inventory control, therefore, aims at ensuring the
availability of required quality material in required quantity, at required time or period and
place with minimum cost. Inventory involves investment of money and locking up of precious
space which has alternate uses. It is said that inventory is a necessary evil. As a result, proper
control has to be exercised over it. In controlling inventory, firms or industries use a number of
techniques and models. Inventory control is generally exercised over raw materials and work in
progress. The basic purpose of inventory control is to maintain optimum level of inventory.
Different methods available for pricing the material issues are presented in the Figure 5.1. Some
of the more commonly used methods of pricing material issues are discussed below:

5.1 First-in-First-out Method (FIFO)

This method which is popularly known as FIFO method is based on the assumption that the units
which are acquired first are issued first. The materials are issued in order of their purchases and
at the price of the original purchase.

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