Material Costing - Solved Problem No.2
The records of
the Khulna Manufacturing Co. Ltd. Show the following data relative to Material
No: B—198:
Balance: March 1, 1967 1,350 units at Rs.
20.50
Received: March 4, 1967 1,400 units at Rs.
21.00
13, 1967 1,200
units at Rs. 22.00
25, 1967 1,100
units at Rs. 21.50
Issued:
March 3, 1967 1,250 units
19, 1967 1,300
units
30, 1967 1,100
Instructions: Find out the inventory balance and the
cost of issue of the material on each of the following bases:
(1) Fifo.
Perpetual inventories are kept and costs are charged out currently.
(2) Fifo. No
book inventory is kept.
Solution:
(1) Fifo – Perpetual
Inventory
(2) Fifo – No
Book Inventory Rs.
Cost of purchases
of the material 1,07,125
Less inventory
of the material (latest costs):
13, 1967: 300 units at Rs. 22/00 = 6,600
30,250
Cost of the
material issued: 76,875
Last—in,
First—out (LIFO) Method:
Under this
method the materials purchased are issued in the opposite order to FIFO i.e.
the items last entered in the stores are first to be issued. Under this method
also the value assigned to the materials issued is same as paid for. This
method has the following advantages:
(1) As the most
recent costs are charged, it renders the calculation of earnings more accurate.
(2) The
fluctuations of net earnings are minimised on account of latest costs being
matched with current revenues.
(3) As the most
recent purchase prices are charged under this system, it enables in the periods
of rising prices to postpone partially the payments of income-taxes because the
profits are shown at reduced figures.
The method is a
little difficult to operate on account of various types of calculations to be
made. Moreover, as the oldest purchases are shown at the purchase prices then
ruling, ruling market prices, particularly in the event of rising prices. This system
can be applied easily where there are not more than three purchased lots on the
stores cards.
The Lifo method
ensures that the most recent costs are charged to work-in-process or other
operating expenses by leaving the oldest costs in the inventory valuations.
In the words of
Matz, Curry and Frank, “The lifo method of inventory valuation does not give an
appropriate measure of consumed materials costs in many types of business, and
detailed issues on the lifo basis are appropriate in relatively few situations……The
lifo method is more appropriate in process costing where individual material
requisitions are seldom used and the materials move into process in bulk lots
as in flour mills, spinning mills, oil refineries, and sugar refineries.”
Sometimes
instead of charging the materials with the different costs of purchases, the
latest cost is used for all the issues of materials. But this method should be
used only when very frequent purchases and issues are involved. If this is not so
sometimes a negative value might have to be assigned on the stores card. For
example:
It will be seen
that although 1,000 lbs are on hand, there is a negative value of Rs. 15,000 on
the stores card.
We give below
two problems to explain the procedures involved in the lifo method.
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