CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Inventory valuation allows companies to provide a monetary value for items that
make up their inventory (stock).
Inventories are usually the largest current asset of a business and are as
important as funds (cash). It is a form of fun proper or accurate measurement or
valuation cannot be overlooked as it forms a greater percentage of an enterprises
general. For manufacturing companies, inventories usually represent approximately 20
to 60 percent (%) of their assets. If inventory is not properly valued, it may result that
expenses and revenue may as well not be properly matched and a company could
make poor business decisions that will affect the companys profit. It is essential the
attributable to the numerous benefits which an organization stands to gain by keeping
an accurately valued stock that meet shareholders needs, demands for financial
information and also the relevant specification of a particular organization. However, it
will be a waste of time if the record accuracy is poor.
Inventory in manufacturing company or concern comprises of the following
components:

Raw materials inventory

Work- in- progress (semi- finished goods) inventory

Finished goods inventory

These components show the relationship between production and sales, and it
enables an organization to offer better service to its customers at a reasonable price.
However, the technique or method used in the valuation of inventories varies
and the values placed on inventories vary in time with the prevailing economic
parameters (inflation, deflation or static economy) and it can also be influenced by the
management policy of the organization. For instance, if the objective of an enterprise
is that of profit maximization, it may result to the use of a particular method so as to
disclose lower profit, thereby using excess fund at its disposal to expand its operations.
This type of organization may discard other methods of valuing inventories in favour
of the method that suit it objectives.
According to Nwoha (2006:69), no area of accounting has produced wider
difference in practice than the computation of amount at which inventories (stocks)
and work-in-progress as stated in financial account.

Inventory valuation method used by an enterprise is determined by a number

of reasons. These include inflation, differences in quantity discounts, frequent
changes in prices of commodity, buying from different suppliers and also the
nature of items or product. For instance a company that deals on perishable goods,
lets say a grocerysaninventoryvaluationstore,methodthatpreferrecognizesthe out
flow of goods that were first in stock. This arises as a result of the perish ability of
the items treated and the high turnover rate could also be accounted for this choice
of method FIFO (first-in, first-out). The level of the three component of the
inventory stated earlier differs among organizations depending on the nature and
volume of operation undertaken. Manufacturing companies have a high level of
raw material inventory and semi-finished goods inventory as it is found in the
grocery stores. Considering the large sums of money tied up in inventory as earlier
stated, Horngren and Foster (2004:756) pointed out that it is pertinent to have an
information model as a resulters(receipts,of the issues and controls) are not properly handled,
it would go a long way to jeopardize
the financial status (liquidity) as well as the profitability position of the firm.
Hence, this research work is a step in the right direction to address and highlight
the role of account professional towards the achievement of choosing and adopting
appropriate inventory valuation methods for each group of industry.

1.2 STATEMENT OF THE PROBLEMS

The problem in achieving a statutory consensus compliance method in the
administration of inventory valuation by Nigerian manufacturing industry has
persisted. An appropriate forum of diverse accounting professional bodies is
required to reach a consensus on the issues of choosing and adopting appropriate
inventory valuation methods for each group of industry. Hence, this research work
is a step in the right direction to address the role of accounting professional
towards the achievement of the objective.

1.3OBJECTIVES OF THE STUDY

The aim of this research work includes the following:
1. To determine whether inventory valuation methods have any impact on the
assessable income tax of Nigerian manufacturing company.
2. To ascertain whether the prevailing economic parameters influences the
inventory valuation method used by Nigerian manufacturing company.
3. To determine whether variances in inventory valuation methods affect
financial reporting positions of Nigerian manufacturing company.
4. To provide an acceptable basis for valuing inventory on hand.

1.4RESEARCH QUESTIONS

The following questions are formulated for the purpose of this study;
1. Does an inventory valuation method have any impact on the assessable
income tax of Nigerian manufacturing company?
2. What influence does the prevailing economic parameter have on the
inventory valuation method used by Nigerian manufacturing company?
3. To what extent does the variance in inventory valuation method affect
financial reporting positions of Nigerian manufacturing companies?

1.5RESEARCH HYPOTHESIS
The following hypotheses are formulated to help achieve the purpose of the
study:
HYPOTHESIS ONE
H0: inventory valuation methods do not have any impact on the assessable income
tax of Nigerian manufacturing companies.
H1: inventory valuation methods have an impact on the assessable income tax of
Nigerian manufacturing companies.

HYPOTHESIS TWO
H0: the prevailing economic parameters do not influence the inventory valuation
methods used by Nigerian manufacturing companies.
H1: The prevailing economic parameter influences the inventory valuation
methods used by Nigerian manufacturing companies.

1.6 SIGNIFICANCE OF THE STUDY

The proper valuation of stock (inventory) cannot be over looked. This
research work is significant in the following ways:
1. It will determine if inventory valuation methods play any significant role in
ensuring the firms accountability.
2. It will determine the role of acco valuation.
3. It will x-ray what true and fair means with regard to inventory valuation.
4. It will determine the causes of misrepresentation of true and fair view of
financial statement of firms and usher useful suggestions to stop the practice.
5. It will offer useful suggestions towards making the store manager more
efficient in preparing or advancing adequate data that will lend credibility to
a true and fair view of a firms operation and financial statement.

1.7SCOPE OF THE STUDY

The study will comparative analysis of the impact of inventory valuation method in
the management of a manufacturing company in Coca-Cola bottling company. Within
the period of the year 2016.

1.8LIMITATIONS OF THE STUDY

In carrying out this research project, the researcher encounters problems
which may be attributed to;
1. Unreliable or irrelevant information obtained from oral interviews.
This was based on the degree of the respond questions asked during
the oral interview. Some respondent thought the research was to
expose their company and thus were unwilling to give adequate and
relevant information.
2. The researcher encountered the problem of not getting back all the
questionnaires administered to respondents for responses.

1.9

DEFINITION OF TERMS

INVENTORY :This is also known as stock. These are assets held for sale in the ordinary
course of business, in the process of production for such sale; or in the form of materials or
supplies to be consumed in the production process or in rendering of services.

FINANCIAL STATEMENTS:These are statements produced at the end of accounting

periods, such as income statement, cash flow and statement of financial position. They are
reports which summarize the financial position. They are reports which summarize the
financial position and operating results of a business.

CONSISTENCY IN INVENTORY VALUATION:This is an accounting standard which

demands for the use of the same method of inventory pricing (valuation) from year to year,
with full disclosure of the effect of any change in method to enhance the comparability of
financial statements presented in the annual report.

MANUFACTURING COMPANIES:These are establishments that combine men, materials

and machinery in an effective manner with the aim of producing goods for human consumption
and also to make profit for the on going of the business.
BUFFER STOCK:It is an additional inventory held in excess of that needed to meet normal
demand and which leads to avoidance of stock out. It could also be referred to as safety stock.

WORK- IN- PROGRESS:This is part of a manufactures inventory and has not yet been
completed and transferred to the finished goods inventory.

STOCK OUT:This refers to when the stores department of a manufacturing company, or a

store runs out of a type of stock before the next order arrives.

ASSESSABLE INCOME:This is the amount of income (after charging expenses against the
gross income) from each source in the year immediately preceding the year of assessment.

CHAPTER TWO
LITERATURE REVIEW
2.1 THEORITICAL FRAMEWORK OF THE STUDY
Inventory problems are as old as history itself; but it was the turn of the 17

th

century that attempts were made to employ analytical techniques in studying these
problems.
The initial impetus for the use of mathematical methods in inventory
analysis seems to have been supplied by the simultaneous growth of manufacturing
industries and the various branches of engineering, especially industrial
engineering. The real need for analysis was first recognized in industries that had a
combination of production scheduling problems.
It was not until after world war 11 that the management sciences and
operation research emerged and detailed attention was focused on the stochastic
nature of inventory problems. However, it is fascinating to observe that economists
were not the first to take active interest in inventory problems even though
inventory plays a cardinal role in the study of dynamic economic behavior. The
possible reason advanced for this lack of interest is probably inherent in the fact
that economists were concentrating their attention mainly on static equilibrium
models. In recent times some economist and mathematicians have taken keen

interest in inventory models. They have not been particularly concerned with
immediate practical application. Instead they have been interested in the models
because of their mathematical properties and economic interpretations.
2.2 THE PROBLEM OF INVENTORY MANAGEMENT
The method to be used in inventory valuation has been the perennial
problem that is prevalent with all organizations. Organizations maintain and keep
adequate inventory for a number of reasons. Fundamentally, it may be
economically impossible or unsound to have goods manufactured or supplied in a
given system precisely at the time the demand for it occurs.
Without inventory, customers will have to wait until the orders were met
from a source external to the client firm or such orders may be delayed until
production has been undertaken. In most cases, customers do not wait for this
delay in production or supply and what happens is that the customers looks for
alternative source of supply which means the loss of that customer either
temporarily or permanently and the loss of the profit on the sale with its spill over
effect.
In some cases, organizations may deem it necessary to hold a good number
of inventories when it is absolutely certain there is a likely possibility of an upward

shift in material input or supply prices. The organization on the other hand may
keep lower inventories when it anticipate a decrease in material or supply prices.
It is pertinent to indicate that in retail concerns, inventories are maintained in
order to have various goods on display but still attract potential customers. There is
this ascertaintion thatvarieties of goods on display to customers help to boost sales
and profit. In practice, raw materials are purchased in large quantities in order to
reduce cost associated with purchasing to obtain a favorable price, minimize
handling and transportation cost. Inventory is of enormous economic benefits to
organizations. However, the valuation of inventory has been a common problem in
most organization.
According to Doug Brinlee (2006:379) he said that a successful business
relies on many factors, one of which is a reliable inventory management system.
Inventory management problems can interfere with a company profits and
customer service. They can cost a business more money and lead to an excess of
inventory over stock that is difficult to move. Most of these problems are usually
due to poor inventory processes and out of date system. They are a number of
problems that can cause havoc with inventory management. Some happen more
frequently than others. Here are some of the more common problems with
inventory system:

 Unqualified employees in charge of inventory.

Using a measure of performance for their business that is too narrow.
Unrealistic business plan for a business for the future.
Not identifying shortage ahead of time.
Too much distressed stockin inventory
Items in stock getting misplaced
Not keeping up with the rising price of raw materials, etc
2.3INVENTORY VALUATION
In an attempt to examine what inventory valuation is all about, it is proper to
begin with what inventory is:
The term inventorycallmindthebottles onmayliquor store shelf or a lot full
of cars awaiting sale. Those are both inventory, but the definition is broader.
Simply put, for accounting purposes anything that will be ultimately sold and
whether it is a raw material or finished good is considered inventory.
According to Frank Wood and Alan Sangster (2008:743) inventory are goods
in which the business normally deals that are held with intention of resale. They
may be finished goods, partly finished goods or raw materials awaiting convention
into finished goods which will then be sold.

According to international financial reporting standard (IFRS), inventories are

assets
Held for sales in the ordinary course of business,
In the process of production for such sale; or
In the form of materials or supplies to be consumed in the production
process or in the rendering of services. Inventories encompass goods
purchased and held for resale including, for example, merchandize purchase
by retailer and held for resale, or land and other property held for resale.
Inventories also encompass finished goods produced, or work in progress
being produced, by the entity and include materials and supplies awaiting
use in the production process. In the case of the service provider, inventories
include the cost of service, as described in international accounting standard
(IAS) 2paragraphs 19, for which the entity has not yet recognized the related
revenue.
The sale of merchandise (finished product) is the primary source of revenue for
most business enterprise.
According to Walter (2009:67) inventory consist of goods held for resale of
consumers, partially completed goods in production, materials and supplies used in
production. Inventory items are acquired and sold continuously in merchandising

business or acquired, placed in production, converted into finished product and sold in
a manufacturing business.

According to the Farlex financial dictionary (2012) , inventory valuation in accounting

is any way to estimatenventoryis and worth. It is pertinent to note therefore that accounting
valuation is not the same as market valuation, but it consists of a selection of accounting
principles appropriate to a particular asset and their application, production cannot flow
smoothly without having inventories- raw materials, work in progress, finished goods and
supplies.
David L. Scott (2007:105) also looked at inventory valuation as the cost
assigned to inventory for the purpose of establishing its current value. Inventory
valuation is determined according to the basis by which a firm assumes inventory
units are sold. If the first unit acquired are assumed to be the first unit sold (FIFO),
costs of the last unit purchased are used for valuing inventory remaining in stock.
Conversely, if the last unit acquired are assumed to be the first unit sold (LIFO) the
cost of the first unit purchased are used for valuing the inventory remaining in
stock.
The two most significant functions in accounting for inventory according to
Walter et al (2009:78) consist of determining the quantity of goods to be included
in inventory and determining the appropriate cost of inventory on hand. The first

function involves stock taking while the second refers to the valuation of
inventory.

The primary basis of accounting for inventory is cost which by definition is the
price or consideration given to acquire an asset. In inventory valuation, cost refers to the
sum of the applicable expenditures and charges directly incurred in bringing an article
to its existing condition or location.
Depending on the character and composition of the inventory, the rule of
cost or market, whichever is lower m each item or to the total of the inventory. The
method should be that which most clearly reflects periodic income. In practice however,
the physical flow of goods frequently do not correspond to the chosen method by the
accountant to record the flow of assets. A situation where the flow of inventory seldom
arises except in the case of specific identification method in inventory costing. Hence, it
was asserted by Walter et al[2010: 112 ]that the assumed flow of cost to be used in
assigning cost to inventory and goods sold need not conform with the physical flow of
good. The question of which physical units of identical goods that were sold and which
remain in inventory is not of any particular importance in the accounting of income
determination.

The frequent movement of physical items into and out of inventory and its
corresponding changes in units cost complicates the accounting for inventory and
cost of goods sold. At the end of a financial year, the accountant apportions the
total cost between the between the current operating period and the future; the later
are placed in an asset account .Inventory is subject to physical deterioration and
damage, decline in value due to changing market conditions. it therefore requires
careful control if needed goods are to be on hand in good condition when they are
require, and if excessive stocks are to be avoided.

2.4

INVENTORY VALUATION METHODS.

There are many methods of methods of valuing inventory. Generally, the

objective of inventory valuation techniques are to provide an acceptable basis for

valuing inventory on hand, to assist in the accurate determination of product cost
and to ascertain the cost of materials issued to production on a consistent and
realistic basis. All methods of inventory valuation are based on cost principle no

matter which method is deemed as applicable to a forms situation. In selecting an

inventory costing model, cost is matched with revenue and on ideal choice is the
method most clearly reflects periodic income.
In costing, raw materials usage is conventionally defined as the opening stock of
raw materials[M1] plus purchase during the period [M2] less closing stocks of raw
materials [M3].Thus raw materials usage [RMU]is :RMU=M1+M2-M3
This is however referred to as inventory difference method. Nevertheless, the
above equation incorporated leakage of materials through losses and damages
cause distortions in performance evaluation and comparison.
There exists a diversity of views on the methods adopted in among financial
accountant and cost accountants. The financial accountants cost accountants adopts
methods such as

Average price method.

Cost price method.

o First-in-first out [FIFO].

o Last in-first out [LIFO].

Market price [Replacement price].

Base stock.
Next-in-first-out.

Latest purchase price.

Highest-in, First out.

Specific identification.

According to Peter Asukwo[1990:90] T the stocks figure in the cost account and th we shall
adopt the cost accountants techniques in the course of this story.

2.4.1 AVERAGE PRICE.

Under the average method we have:
1. Simple average price.
2. Moving average price.
3. Weighted average price.
2.4.1

SIMPLE AVERAGE PRICE.

This is defined by CIMA as A pri the total of the materials in the stock from which

the material to be priced could be drawn, by the number of prices used in stock irrespective of
the quantities involved. The lot which is exhausted is

excluded in computing the average price. Materials are not therefore changed out
at actual cost, so a profit or loss may be incurred merely by adopting this price.

This method pays no regard to relative quantities held at each price; therefore just a
few [little] can be said in favour of it. This method should only be used when
prices do not fluctuate very much and the stock value is very small.
Despite the fact that simple average price is easy to compute, it is misleading and
can give very false issue and valuation figures.
2.4.2

WEIGHTED AVERAGE PRICE.

AccordingThistoisthe CIMApricewhich is calculated by dividing the total

cost

of material to be priced by the to

This is the most often used average price method which assumes that every

batch taken from the store room consists of uniform quantities from each supply in
stock at the time of issue. The method determines the unit price by dividing the
total cost of materials in stock by the total quantity of materials outstanding.
This method uses a weightedaverage cost per inventory unit in assigning
cost to units sold and to inventory. A weightedaverage cost of goods available for
sale is recalculated at the time of each purchase. Notice that the most current
average cost is used to calculate the cost of each sale. Weighted average will
produce different results under a perpetual other than a periodic inventory system.

Larson and Miller [1992:402] stated that weighted average price is an

inventory pricing system in which the unit prices of the of the beginning and of
each purchase are weighted by number of units in the beginning inventory and
each purchase .The total of these amounts is then divided by the total number of
the ending inventory of the units that were sold.
The benefits according to the use of this method include:
1. Simplicity in operation.
2. It does not lead to unrealized profits or losses.
3. According to Asukwo [1990:108]Thismethodwas. recommended by
international accounting standard[IAS 2]and the statement of accounting
standard [SAS4] for the determination of historical cost of inventories.
4. The benefit of minimizing the effects of rapid price fluctuation, thereby
showing the remaining stock at cost price.
2.4.3

MOVING AVERAGE.
This is a modified form of the weighted average method or technique. It is
employed in a perpetual inventory record system in order to compute the unit price
at which materials could be issued, this method divides the total cost of material of
a particular class by the number of unit on hand to arrive at the price. Under the
method, the average unit cost is recomputed each time stock or purchase of new

materials is received subsequently, any issue is then made at the unit cost until
another receipt of stock necessitates the computation of a unit cost.
Moving average is a cost flow assumption used in perpetual inventory
system, new weighted average is computed each time goods are purchased. This
method is more cumber some to opera than other average costing methods to due
to the fact that it demands accurate track records of costs and quantities each time
stock is receive.
2.4.4 COST PRICE
They include
1. First-in-First out[FIFO].
2. Last-in-First out [LIFO]
2.4.4.1. FIRST IN FIRST OUT [FIFO]
In this method stocks are issued in strict chronological order. That is the
oldest materials are issued first and are issued at the rate at which they were
received.
In other words materials in the store are issued according to their order of
receipts into the store. Where there are opening stocks, they

were issued first then the unit from the first purchase issued next. This method is

not suitable in times of rising prices and inflation.

This is because issue price of materials to production will be low while the
cost of replacement of materials will be high. This will in turn charge a lower cost
of goods sold to income statement.
This method follows the principle that items in the beginning inventory or
materials purchased first are presumed to be charged to production first, therefore
the items from the earliest purchase are issued next and so on. Thus all items left in
the closing stock are deemed to have come from the most recent purchase, whereas
those issued to production are from the earliest purchase.
Eyisi (2003:24)stated that this method is based on the based on the
assumption that the oldest purchased goods are sold or issued out first and that
most recently purchased goods are the closing stock balance. First-in-First- Out
(FIFO)methods assigns to the issued [transferred]out stocks from the stores.
Hence the closing stock is measured by the costs of the units most recently
acquired. The advantage of this method is that, it is assumed that cost of materials
issued out in time of deflation reflects the previous stocks (material) acquired at a
lower price.

According to the Farlex Financial dictionary (2012), First-in, First-out

(FIFO) method is an accounting procedure for identifying the order in which items
are used or sold. With FIFO, the oldest remaining items are assumed to have been
sold first. During a period of inflation this tends to keep cost low for accounting
purposes. It results in higher reported profits and a greater tax liability, however.
This method is most suitable in valuing agricultural products which are
perishable and subject to a fairly speedy deterioration as time elapses. Also, it
maybe used by Grocery stores which deals on items with high level of
perishability. Also, this method checks material obsolescence, avoidable waste and
deterioration. The method ensures that materials issued are at cost and therefore
avoids unrealized profit or losses which may arise from a random issue of
materials. And it is also a representative of current prices and thereby avoiding the
use of outdated prices in valuing closing stock.
This method is an actual cost system and it is acceptable to SAS 4. This
method is also accepted by the Board of Inland Revenue for tax assessment
purposes in the word of Eyisi ( 2003:25) the disadvantage is that higher tax is paid
as higher profit is been measured due to lesser cost at initial stage of purchase;
which is issued out. This method is acceptable to inland revenue and is
recommended by SSAP 9.

2.4.4.2

LAST IN FIRST OUT (LIFO )

This is a method of inventory valuation base on the assumption that the

goods purchase most recently(the last in) are sold or used first (the first out). The
remaining items are assumed to have been purchased at successively earlier
periods. In this method, value of the inventory at the end of an accounting period is
based on the value of items purchased earliest. During periods of high inflation
rate, the last in first out (LIFO) method yield lower value of the ending inventory,
higher cost of goods sold, a lower gross profit ( hence lower taxable income) than
that yielded by the application of the first in first out (FIFO) method. During
prolong inflationary periods, however LIFO method can seriously understate the
value of inventory because the cost of replacing it would be much higher than the
value shown in account.
This method is also referred to as at first in last out (FILO) which is define
as method of inventory valuation base on the assumption that goods are sold or
used in the opposite chronological order in which they are bought. Hence, the cost
of goods purchase first is the cost of goods sold last. To visualize this, it may easier
to consider inventory to be a stake of plates. The first plate added (first in) will stay
at the bottom of the stack as long as new plate added on top. In times of rising
prices the FILO method record the sale of the most recent items first. FILO is the
same as the last in first out (LIFO) accounting method.

Consequently, the unit cost of beginning inventory and the earliest purchases
are incorporated in the ending inventory figure. Hence, ending cost is measured at
the oldest cost where as the production cost is measured at the newest unit cost.
Larson and miller (1992;424) noted that one argument for the use of LIFO is
base on the fact that a going concern most replace the inventory items in sales.
When goods are sold replacement are purchased. According to this point of view a
correct matching of cost with revenue requires matching replacement cost with
sales that make the replacement necessary. Although the cost of the most recent
purchase is not quite the same as replacement cost, they are close approximations
of replacement costs. Because LIFO assigns the most recent purchase costs to
income statement, LIFO (compared to FIFO and weighted average) comes closest
to matching replacement cost with revenues. The LIFO method is suitable in terms
of rising prices because materials issued are price at the price of the latest available
consignment in the store which is closely related to the current price level whereas
FIFO method is useful when prices of materials are falling.
Eyisi, S A (2003:25) stated that this method is the opposite of FIFO. In this
method stocks issued out are priced last in purchased goods. The assumption here
is that the issued out material is assumed to be last in purchased (received) goods.
As the result of the above, the closing stock unit are valued at the oldest unit goods
available. This method is useful during the time of inflation; as materials acquired

previously or which are valued at the current price of recently purchased goods.ie.
at a lesser price assumed to be valued at the most recent price of purchased of
goods. Under this method cost are matched with income and product cost is based
on current prices and as such could be said to be more realistic.
The Advantages of LIFO includes the following;

It ensures that issues are close to current economic value stock.

Valuation of stock balance is usually very conservative.

Materials are issued at cost price and therefore, no profit or loss will result
by using this method.
This method also have Disadvantage and they include:

Since the goods are issued out based on the current stocks received, the
oldest materials are left in stock and this exposes them to the risk of loss
through pilferage ,obsolescence, deterioration and spoilage.

It makes comparison between two jobs or contracts difficult when the

materials issued in the two jobs were valued using different methods.
It is administratively cumbersome because it requires the recording system
to keep track of batches.

2.4.3 MARKET PRICE (REPLACEMENT PRICE)

This is the system of pricing all material issues at the market price at the
time of issue. This method is also referred to as replacement price. While this may
be desirable for specific purpose, it is very difficult in practice to obtain current
cost for each item in stock and where revised price list are available, the risk of
revaluing the entire stock each time a change takes place enormous. Hence, the
method is most suitable for business that take large quantities of materials in
advance of requirements in order to obtain cheap prices; the benefit of which will
not be passed to the customer.
The advantages of this method are
The result of good or poor buying is disclosed.
It keeps costs in line with current prices
Materials are charged to production at the most current and realistic price;
such that if there is any full in price of materials the accompanying loss must be
accepted.
Its disadvantages are:
1) A great deal of work is involved in obtaining information and keeping the
market price up to date.

2) The method departs from cost; consequently, confusing elements are

introduced into the cost accounts.
3) During inflation, the stock balance may be overstated when prices are
falling and large sum has to be written off to reduce it to market value.
4) Substantial differences may arise on the store records and dealing with this
tends to complicate the casting system unnecessarily.
2.4.4

BASE STOCK

This method uses the assumption that each establishment maintains a

minimum quantity of material in stock such minimum quantity is known as safety,
buffer or base and this should be used only when an emergency arises.
According to Eyisi, S.A(2003:27), this method assumes that initial
purchased material would provide buffer (i.e base)stock and the store ledger (i.e
means buffer material are seen to be existing in the company store)at any point in
time.
The base is created out of the first consignment of the materials purchased and,
therefore, it is always valued at the cost price of the first batch and is carried
forward as fixed asset. The base stock method is not an independent method of
pricing issues but works with some other methods, such as LIFO, FIFO, etc. Any
quantity over and above the base stock is issued in accordance with the other

method which is used in conjunction with this method. like LIFO method, this
method is completely rejected by the SAS 4.
2.4.5 NEXT IN FIRST OUT
Under the next in, first out, stock is valued at the price estimated for the
next purchase. The price is similar to the replacement price unless the next
order will not be placed for sometime.
2.4.6 LATEST PURCHASE PRICE
In this method, the value of closing stock is determined by applying the
cost of the latest item purchase to the number of units on hand.
2.4.7 HIGHEST IN, FIRST OUT
In this method, issues are valued at the highest price paid for a batch until
stock of that batch is exhausted and so on. This method is very hectic to
administer and in comparison with other methods, it has the effect of
overstating production cost and understating ending inventory. It is pertinent to
however stress that the method of pricing inventory issues employed by any
form will depend on the circumstances of the business and on the nature of the
materials involved. A good inventory accounting system enables the provision
of relevant inventory data and information to management in determining the

value attributable to inventory at the end of the financial period. Stock valuation
when appropriately carried out gives a true and fair view of the value and
quantity of stock with respect to the relevant period.
Accountants give useful advice concerning estimates of the amount and the
quantity of stock and work in progress during a given period. The major
problem in maintaining accurate accounting records or inventory management
is the constant fluctuation in prices of materials and labour incorporated in
product or inventory costs.
2.4.8 SPECIFIC IDENTIFICATION
This method is used for non standardized items. Unlike standardized items
(items of stock in regular use), these materials do not loose their identity when
placed in the stores because each material has unique specifications, for
example, electric motors.
In specific identification the buying price (purchase price) of each item is
specifically identified so that the actual price of the item is issued to production.
This implies that each batch of material supplied retains its unique identity; as a
result, it is easy to issue out materials to jobs at actual invoice price. Similarly,
it offers a great degree of ease in determination of closing stock figures; as

closing stock is valued by adding the costs of those items remaining on hand
during the relevant period.
To effectively operate this method, it is worthwhile to record the batch
numbers on the stores requisition card and to keep a running balance of each
batch on the stock ledger card. This is accomplished by simply adding the cost
price of each unit of stock as identified and recorded whenever an issue is
made. This technique might be possible for a firm handling small numbers of
items or where each batch of items purchased retains its separate identity even
when it is mixed up with other batches. The specific identification method
could be applied to an automobile retailer who deals on expensive and
sophisticated spare parts, automobiles, etc. however, this method is
impracticable and onerous when a manufacturing concern deals on a good
number of items and as a result the identity of individual item is lost. This
technique is methodical when identical items are involved. Practical
consideration makes specific identification inappropriate in most cases.
According to Monwuba (1995:23), the specific identification method is
tedious and impracticable where a large number of different items of materials
change frequently. However, this method of valuing material issues is useful
when materials are purchased for a specific job order.

This method requires a business to identify each unit of merchandize with

the unit cost and retain that identification until the inventory is sold. Once a
specific inventory item is sold, the cost of the unit is assigned to cost of goods
sold. Specific identification requires tedious record keeping and is typically
only used for inventory of uniquely identifiable goods that have fairly high per
unit cost (example fine jewelry, automobiles, etc). This method allows investors
to reduce or offset capital gains by picking a specific lot of securities to be used
as basis for sale.