Description
Inventory Valuations
Inventory Valuations
According to AS-2 (Revised), “inventories are assets held for sale in the ordinary course of Business; in the process of production for sales; or in the form of material or supplies to be Consumed in production process or in the rendering of services.” Inventory vary according to the nature of the business:
Trading Concerned: Inventories under this type encompass products purchased for resale in the existing form.
Manufacturing Concerned: Inventories under this type consist of raw materials, work in Progress and finished goods.
Inventory Record System
Periodic Inventory System
Perpetual Inventory System
Periodic inventory system is a method of ascertaining inventory by taking the actual Physical count ( measure or weight) of all the inventory items on hand at a particular Date at the end of an Accounting period. It is also known as the physical inventory System because of the actual physical count. Cost of Goods sold = opening stock + purchases – Closing stock
Perpetual Inventory System is a system of records that reveals the physical movement of Stocks and there current balances. It is a method of recording inventory balances after Each purchase and sale takes place. Closing inventory is calculated as follows: Closing inventory = Opening inventory + purchases – cost of goods sold
According to the provision of AS-2 (Revised) only the following method of inventory Valuation are permitted:
i. Specific Identification (of cost) method ii. FIFO iii. Weightage Average Cost Method
Specific identification of Cost
Specific identification of costs means that specific costs are attributed to identified items Of inventory. For items which are segregated for a specific project (purchased or produced), Appropriate treatment for such items will be of much important. The process of assigning costs involves the following two procedure: i. one has to keep track of the purchase price of each specific unit ii. To know which specific units were sold. The most important feature of the method is that business enterprise must keep a track Of the cost of each individual items purchased and sold This method is suitable where the purchases are not frequent.
FIFO
This method is based on the assumption that flow is in the order in which expenditure were made
To explain the units that are received first will be sold first. The flow of cost is presumed to be the same as flow of goods . The closing (ending) inventory consists of the latest lots and is valued at the price paid for such lot
From the following information calculate the value of ending inventory and cost of Goods sold. Date Transactions units 100 400 300 500 400 price per unit(Rs) 10 15 20 -
Jan 2 opening balance b/f Jan 9 purchases Jan 14 sold Jan 25 purchases Jan 29 sold
Date Jan 2nd Jan 9th
Stock Ledger under FIFO Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 100 400 10 10 15 1000 1000 6000
Jan 14th
100 200 500 20 10,000 -
10 15 -
1000 3000 -
200 200 500
15 15 20
3000 3000 10000
Jan 25th
Jan 29th
-
-
-
200 200
15 20
3000 4000
300
20
6000
Calculation of value of ending inventory Rs
Statement showing value of inventory & CGS Rs ( Periodic system)
Opening inventory Add purchases (6000 + 10,000)
Less cost of goods sold (1000+ 3000+ 3000+ 4000) Value of closing inventory
1000
16000
Opening inventory Add Purchases (6000+10000)
Less closing stock (300 x 20) Cost of goods sold
1000
16000 6000
11000 6000
11000
Merits of FIFO i. ii. iii. iv. This method is suitable for perishable goods FIFO is easy to operate Assignment of cost against revenue is matched. Closing inventory valuation reflects the true financial position due to recent purchases.
Demerits of FIFO i. In the period of rising prices, higher income will be reported resulting higher tax liabilities ii. In the period when prices are fluctuating, the cost of purchase do not represent current market price. iii. In case where production cycle is lengthy, true profit cannot be shown in income statement.
LIFO Though this method is not recognized by AS-2 (Revised), this method is required for the Academic interest. Under this method, goods which are purchased last are sold first.
Date Jan 2nd Jan 9th
Stock Ledger under LIFO Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 100 400 100 100 100 100 500 10 10 15 10 15 10 15 20 10 15 20 1000 1000 6000 1000 1500 1000 1500 10000 1000 1500 2000
Jan 14th
300
15
4500
Jan 25th
500
20
10,000
-
-
-
Jan 29th
-
-
-
400
20
8000 100 100 100
Calculation of Ending Inventory Perpetual system
Calculation of valuation of inventory & CGS Periodic System
Opening inventory Add Purchases (6000 + 10,000)
1000
16000 17000
Opening inventory Add purchases (10000 + 6000)
1000
16000 17000
Less Cost of goods sold (4500 + 8000) Closing inventory
12500 4500
Less closing inventory (1000+1500+2000) Cost of goods sold
4500 12500
Weighted Average Method
The weighted Average Method is based on the assumption that: i. Each sale of goods consists of a due proportion of the earlier lots ii. Such sale is valued at the weighted average price
Total cost of goods in stock
Weighted Average Price =
Total quantity of goods in stock
( whereas Total Cost = Quantity x cost per unit)
Date Jan 2nd Jan 9th
Stock Ledger under WAC Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 500 10 14 1000 7000
Jan 14th Jan 25th 500 20 10,000
300 -
14 -
4200 200 700
14
2800
18.29 12800
Jan 29th
-
-
-
400
18.29 7316 300
18.29
5484
Calculation of Ending Inventory Perpetual system
Calculation of valuation of inventory & CGS Periodic System
Opening inventory Add Purchases (6000 + 10,000)
1000
16000 17000
Opening inventory Add purchases (10000 + 6000)
1000
16000 17000
Less Cost of goods sold (4200 +7316) Closing inventory
11516 5484
Less closing inventory (300 x 17) Cost of goods sold
5100 11900
Statement showing the weighted Average Cost per unit under WAC( applying Periodic inventory system
Date Jan 2nd Jan 9th Jan 29th
Qty 100 400 500
Rate 10 15 20
Amount 1000 6000 10000 17000
WAC = 17000 1000 = Rs 17 per unit
Merits of weighted Average cost
i. This method is realistic, objective & consistent ii. Manipulation may not be possible iii. It average out the effects of price fluctuations
Demerits of Weighted Average Cost i. This method needs more calculation work at each and every stage ii. The ending inventory differs from the conventional method of valuation of closing date.
Economic order quantity
Economic order Quantity is that size of the order which gives maximum economy In purchasing any item of material. In order to determine the economic or optimum order quantity, an analysis of the various Cost associated with the ordering quantity is made. This cost may be divided into two parts: i. Material Acquisition costs & ii. Material Carrying cost Material acquisition cost arises on account of having to process an order Material carrying cost include interest charges on investment in material, insurance costs, Storage cost etc
The material acquisition costs are related to the number of orders placed during a Given period On the other hands, carrying cost, which are variable or semi variable in nature, tend to Change nearly in directly proportion to the level of stock carried in the manufacturing Concerned.
Calculation of EOQ EOQ =
?
2AS I
‘A’ stands for annual consumption of material in terms of units ‘S’ stands for cost of placing one order including the cost of receiving it ‘I’ stands for interest payment per unit per annum ( or carrying cost per unit per annum)
Calculate EOQ from the following information
Annual usage is 10,000 units Cost of placing one order Rs 50 Cost of material per unit is Rs 25 Annual carrying Cost of one unit is 10% of inventory value
?
2 x 10000 x 50 2.5
I = Rs.25 x 10 % = Rs 2.50
Question The annual demand for the product is 6400 units. The unit cost is Rs.6 and inventory Carrying cost per unit per annum is 25% of the average inventory cost. If the cost of procurement is Rs.75 , Determine a. EOQ b. Number of orders per annum c. Time between two consecutive orders.
doc_702979566.pptx
Inventory Valuations
Inventory Valuations
According to AS-2 (Revised), “inventories are assets held for sale in the ordinary course of Business; in the process of production for sales; or in the form of material or supplies to be Consumed in production process or in the rendering of services.” Inventory vary according to the nature of the business:
Trading Concerned: Inventories under this type encompass products purchased for resale in the existing form.
Manufacturing Concerned: Inventories under this type consist of raw materials, work in Progress and finished goods.
Inventory Record System
Periodic Inventory System
Perpetual Inventory System
Periodic inventory system is a method of ascertaining inventory by taking the actual Physical count ( measure or weight) of all the inventory items on hand at a particular Date at the end of an Accounting period. It is also known as the physical inventory System because of the actual physical count. Cost of Goods sold = opening stock + purchases – Closing stock
Perpetual Inventory System is a system of records that reveals the physical movement of Stocks and there current balances. It is a method of recording inventory balances after Each purchase and sale takes place. Closing inventory is calculated as follows: Closing inventory = Opening inventory + purchases – cost of goods sold
According to the provision of AS-2 (Revised) only the following method of inventory Valuation are permitted:
i. Specific Identification (of cost) method ii. FIFO iii. Weightage Average Cost Method
Specific identification of Cost
Specific identification of costs means that specific costs are attributed to identified items Of inventory. For items which are segregated for a specific project (purchased or produced), Appropriate treatment for such items will be of much important. The process of assigning costs involves the following two procedure: i. one has to keep track of the purchase price of each specific unit ii. To know which specific units were sold. The most important feature of the method is that business enterprise must keep a track Of the cost of each individual items purchased and sold This method is suitable where the purchases are not frequent.
FIFO
This method is based on the assumption that flow is in the order in which expenditure were made
To explain the units that are received first will be sold first. The flow of cost is presumed to be the same as flow of goods . The closing (ending) inventory consists of the latest lots and is valued at the price paid for such lot
From the following information calculate the value of ending inventory and cost of Goods sold. Date Transactions units 100 400 300 500 400 price per unit(Rs) 10 15 20 -
Jan 2 opening balance b/f Jan 9 purchases Jan 14 sold Jan 25 purchases Jan 29 sold
Date Jan 2nd Jan 9th
Stock Ledger under FIFO Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 100 400 10 10 15 1000 1000 6000
Jan 14th
100 200 500 20 10,000 -
10 15 -
1000 3000 -
200 200 500
15 15 20
3000 3000 10000
Jan 25th
Jan 29th
-
-
-
200 200
15 20
3000 4000
300
20
6000
Calculation of value of ending inventory Rs
Statement showing value of inventory & CGS Rs ( Periodic system)
Opening inventory Add purchases (6000 + 10,000)
Less cost of goods sold (1000+ 3000+ 3000+ 4000) Value of closing inventory
1000
16000
Opening inventory Add Purchases (6000+10000)
Less closing stock (300 x 20) Cost of goods sold
1000
16000 6000
11000 6000
11000
Merits of FIFO i. ii. iii. iv. This method is suitable for perishable goods FIFO is easy to operate Assignment of cost against revenue is matched. Closing inventory valuation reflects the true financial position due to recent purchases.
Demerits of FIFO i. In the period of rising prices, higher income will be reported resulting higher tax liabilities ii. In the period when prices are fluctuating, the cost of purchase do not represent current market price. iii. In case where production cycle is lengthy, true profit cannot be shown in income statement.
LIFO Though this method is not recognized by AS-2 (Revised), this method is required for the Academic interest. Under this method, goods which are purchased last are sold first.
Date Jan 2nd Jan 9th
Stock Ledger under LIFO Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 100 400 100 100 100 100 500 10 10 15 10 15 10 15 20 10 15 20 1000 1000 6000 1000 1500 1000 1500 10000 1000 1500 2000
Jan 14th
300
15
4500
Jan 25th
500
20
10,000
-
-
-
Jan 29th
-
-
-
400
20
8000 100 100 100
Calculation of Ending Inventory Perpetual system
Calculation of valuation of inventory & CGS Periodic System
Opening inventory Add Purchases (6000 + 10,000)
1000
16000 17000
Opening inventory Add purchases (10000 + 6000)
1000
16000 17000
Less Cost of goods sold (4500 + 8000) Closing inventory
12500 4500
Less closing inventory (1000+1500+2000) Cost of goods sold
4500 12500
Weighted Average Method
The weighted Average Method is based on the assumption that: i. Each sale of goods consists of a due proportion of the earlier lots ii. Such sale is valued at the weighted average price
Total cost of goods in stock
Weighted Average Price =
Total quantity of goods in stock
( whereas Total Cost = Quantity x cost per unit)
Date Jan 2nd Jan 9th
Stock Ledger under WAC Method Receipts (purchases) Issues (sales) Balance Qty Rate Amount Qty Rate Amount Qty Rate Amount 400 15 6000 100 500 10 14 1000 7000
Jan 14th Jan 25th 500 20 10,000
300 -
14 -
4200 200 700
14
2800
18.29 12800
Jan 29th
-
-
-
400
18.29 7316 300
18.29
5484
Calculation of Ending Inventory Perpetual system
Calculation of valuation of inventory & CGS Periodic System
Opening inventory Add Purchases (6000 + 10,000)
1000
16000 17000
Opening inventory Add purchases (10000 + 6000)
1000
16000 17000
Less Cost of goods sold (4200 +7316) Closing inventory
11516 5484
Less closing inventory (300 x 17) Cost of goods sold
5100 11900
Statement showing the weighted Average Cost per unit under WAC( applying Periodic inventory system
Date Jan 2nd Jan 9th Jan 29th
Qty 100 400 500
Rate 10 15 20
Amount 1000 6000 10000 17000
WAC = 17000 1000 = Rs 17 per unit
Merits of weighted Average cost
i. This method is realistic, objective & consistent ii. Manipulation may not be possible iii. It average out the effects of price fluctuations
Demerits of Weighted Average Cost i. This method needs more calculation work at each and every stage ii. The ending inventory differs from the conventional method of valuation of closing date.
Economic order quantity
Economic order Quantity is that size of the order which gives maximum economy In purchasing any item of material. In order to determine the economic or optimum order quantity, an analysis of the various Cost associated with the ordering quantity is made. This cost may be divided into two parts: i. Material Acquisition costs & ii. Material Carrying cost Material acquisition cost arises on account of having to process an order Material carrying cost include interest charges on investment in material, insurance costs, Storage cost etc
The material acquisition costs are related to the number of orders placed during a Given period On the other hands, carrying cost, which are variable or semi variable in nature, tend to Change nearly in directly proportion to the level of stock carried in the manufacturing Concerned.
Calculation of EOQ EOQ =
?
2AS I
‘A’ stands for annual consumption of material in terms of units ‘S’ stands for cost of placing one order including the cost of receiving it ‘I’ stands for interest payment per unit per annum ( or carrying cost per unit per annum)
Calculate EOQ from the following information
Annual usage is 10,000 units Cost of placing one order Rs 50 Cost of material per unit is Rs 25 Annual carrying Cost of one unit is 10% of inventory value
?
2 x 10000 x 50 2.5
I = Rs.25 x 10 % = Rs 2.50
Question The annual demand for the product is 6400 units. The unit cost is Rs.6 and inventory Carrying cost per unit per annum is 25% of the average inventory cost. If the cost of procurement is Rs.75 , Determine a. EOQ b. Number of orders per annum c. Time between two consecutive orders.
doc_702979566.pptx