Page 95 - DCOM202_COST_ACCOUNTING_I

Unit 5: Methods of Valuing Material Issues

! Notes
Caution This method uses the price of the last batch received for all issues until all units
from this batch have been issued, when the price is the previous batch received is used.
Usually, however, a new delivery received before the first batch is fully issued, in which case the
new delivery price becomes the “last-in” price and is used for pricing issues until either the batch
is exhausted or a new delivery received. In this case, there are two points to be noted:

z z The method can result in many batches being only partially ‘written off ’.
z z This is a book keeping method and must not be confused with the physical method of issue
used by the storekeeper, who will always issue the oldest stock first.

Advantages of LIFO Method

This method has the following advantages:
(a) It tends to level profits and losses during periods of rising and falling prices,
(b) This method is also quite simple to operate, particularly when prices are fairly steady,
and
(c) It keeps value of issues close to current economic values.

disadvantages of LIFO Method

This method has the following disadvantages:
(a) It is cumbersome and shows out of date figures in the balance sheet,
(b) Valuation of stock balance may not be acceptable for income-tax purposes, and

(c) This method can be used satisfactorily where following conditions exist:
™ z Price fluctuations are considerable for most of the materials, and
™ z The relative value of materials is large in comparison to the total cost of the
product.

Example: Mahesh and Sons have purchased the material as under:

Jan. 3, 2006 500 Kg. of crude oil @ ` 2 per kg.
Jan.18, 2006 350 Kg. of crude oil @ ` 3 per kg.
Jan. 25, 2006 600 Kg. of crude oil @ ` 2.50 per kg.
Feb. 4, 2006 500 Kg. of crude oil @ ` 2.75 per kg.
Issue there from are as under:

Jan 19, 2006 600 Kg. of crude oil
Jan. 27, 2006 450 Kg. of crude oil
Feb. 5, 2006 500 Kg. of crude oil
Feb. 7, 2006 150 Kg. of crude oil
prepare the Stores Ledger Account using the following methods of pricing materials issue.

(a) Fist-in-First-out method, and
(b) Last-in-First-out method.

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