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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