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Inventory Pricing & Valuation: U.Kalpanadevi Ii-Mba Michael Institute of Management

This document discusses inventory pricing and valuation methods. It describes the objectives of inventory valuation as ascertaining purchase price, calculating production costs, and arriving at closing inventory value. It also outlines steps for physical counting, cost/market price ascertainment, and valuing inventory at cost or net realizable value. Several pricing methods are defined, including FIFO, LIFO, weighted average, and standard costing. The goals and mechanics of each method are briefly explained.

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56 views17 pages

Inventory Pricing & Valuation: U.Kalpanadevi Ii-Mba Michael Institute of Management

This document discusses inventory pricing and valuation methods. It describes the objectives of inventory valuation as ascertaining purchase price, calculating production costs, and arriving at closing inventory value. It also outlines steps for physical counting, cost/market price ascertainment, and valuing inventory at cost or net realizable value. Several pricing methods are defined, including FIFO, LIFO, weighted average, and standard costing. The goals and mechanics of each method are briefly explained.

Uploaded by

yokesh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INVENTORY

PRICING &
VALUATION

U.KALPANADEVI II- MBA


MICHAEL INSTITUTE OF MANAGEMENT

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.

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.

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.

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)

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

Notional Price Methods:

l) Standard Price
m) Inflated Price
n) Re-use Price
o) Replacement Price

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.

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

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.

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.

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.

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.

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

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.

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


THANK YOU

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