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COSTING
BY:- Dr. Narendranath
Sengupta
INVENTORY SYSTEM
PERPETUAL PERIODIC
INVENTORY INVENTORY
SYSTEM SYSTEM
INVENTORY SYSTEM
Perpetual Inventory System:-This method is
widely used. It is a method of recording inventory
balances after every receipt & issue, to facilitate
regular checking and to obviate closing down for
stock taking. Thus, this system gives a complete
record of inventory quantities & valuation on
continuous basis.
Periodic Inventory System:-Under this the quantity
& value of inventory are reviewed at a fixed time
interval, such as weekly, monthly, quarterly or the
like. However, in the actual practice usually this
review takes place at the end of the accounting
period.
METHOD OF INVENTORY VALUATION
HISTORICAL LOWER
COST OF
METHOD COST
AVERAGE BASE
SPECIFIC
FIFO LIFO COST HIFO NIFO STOCK
IDENTIFICATION
METHOD METHOD
First in first out (FIFO) method
This method uses the most recent price paid for
the goods as a basis for valuation. The basis
philosophy behind this approach of inventory
valuation is that the first units purchased are
considered the first units issued/consumed.
Thus, according to FIFO method as it is
frequently called the physical flow of the units
follow a chronological order. This method is
most appropriate for perishable products like
milk, vegetables and fruits.
Advantages & disadvantages of FIFO
Advantages of FIFO:-
Its application is simple.
It does not allow management to manipulate income.
Its tend to produce an ending inventory cost valuation
which approximates the current market value.
It provides a reasonable approximation of the actual flow
of good.
Disadvantage of FIFO:-
It attracts heavier tax burden if applied under inflationary
income.
It involves complicated calculation and therefore,
it is more sensitive to clerical errors.
Numerical of FIFO method
Following information is available regarding
procurement and issue of an item for the month of
February 2006:-
Advantages of LIFO:-
LIFO attempts to reduce distortions in the profit
and loss a/c attributable to inflation.
It is appropriate method of involuntary valuation
during inventory period.
Disadvantages of LIFO:-
It permits management to manipulate income.
It is dramatically opposed to the flow of goods.
Numerical of LIFO method
Form the information for the year May 2006 relating
to Seema & co. Ltd., calculate the value of
inventory on 30th May as per LIFO method.:-
ORDERING CARRYING
COST COST
ORDERING COSTS
It is the cost of getting an item into the firm’s
inventory. At the time of placing an order for
stock replenishment, certain cost are involved
which are known as known as ordering costs.
They include costs like requisition & purchase
costs, follow-up costs, inspection checking &
handling costs &so on. Such costs vary with the
number of orders placed and the number of
items ordered. The more frequently the orders
are placed, & fewer quantities purchased on
each other, the greater will be ordering costs
and vise-verse.
CARRYING COST
Carrying costs:- These are those cost which are
incurred in maintaining an inventory including
storage, warehousing, insurance, & interest on
capital invested in inventory. There are two ways of
calculating EOQ.:-
Mathematical approach.
Graphic approach.
METHODS OF CALCULATING
EOQ
MATHEMATICAL GRAPHIC
APPROACH APPROACH
ASSUMPTIONS FOR EOQ’S
MODEL
The forecasted usage per demand for a
given period is known.
It is even throughout the year.
Inventory can be replenished immediately.
The cost per order is constant.
The cost for carrying is fixed for average
level of inventory.
Average level of inventory=
Q+0 = Q
2 2
Ordering cost = UF
Q
U x F = UF
Q Q
Carrying cost = Q x P x C
2
MATHEMATICAL APPROACH
Under mathematical approach, it can be
expressed as:-
EOQ = 2 UF
(IN UNITS) P*C
TOTAL COST
c CARRYING
o COST
s
t
ORDERING COST
E.O.Q
Order size (quantity)
NUMERICAL ON EOQ
FROM THE FIGURES GIVEN BELOW,
CALCULATE ECONOMIC ORDER
QUANTITY.:-
TOTAL CONSUMPTION ON MATERIAL
1800 UNITS.
ORDERING COST OF Rest. 20 PER
ORDER.
CARRYING COST 10% ON AVERAGE
INVENTORY.
PRICE PER UNIT Rs. 40
NUMERICAL
A company requires 10000 units of a certain item
annually. The purchase price per order is Rs.
20 and the fixed cost per order is Rs. 150. The
inventory carrying cost is 25% per year.
a) Calculate EOQ.
b) Suppose the supplier offers you following
discount—
if you order above 1000 units you will get a 2%
discount. Now what decision should be taken.
SOLUTION
a) EOQ = 2UF
PC
U=10000, F=150, P=20, C=25% or 0.25
EOQ = 2x10000x150
20 x 0.25