Methods of valuation of inventories: First in first Out (FIFO) method Last In First Out (LIFO) method Weighted Average

Price method Highest In first Out (HIFO) Method Specific Identification Method Next In First Out Method ( NIFO) Method Base stock method a) FIFO FIFO method is based on the assumption that the goods which are received first are issued first. The goods sold, therefore, consists of the earliest lots and the ending inventory consists of the latest lots. The ending inventory is stated in the Balance Sheet at a value nearer the current market price. Advantages Values the stock closer to the current market price - most recent purchases Based on cost no unrealised profit Realistic normal procedure of selling those materials/goods which have been longest in stock. Disadvantages Involves complicated calculations and hence increases the possibility of clerical errors. Comparison between different jobs using the same type of material becomes difficult. FIFO method is suitable for Perishable goods No frequent purchases Moderate fluctuations in the price of materials Material easily identifiable as belonging to a particular lot b) LIFO It is based on the assumption that the goods which are received last are issued first. Therefore the goods sold consists of the latest lots and the ending inventory consists of the earliest lots. The ending inventory is understated in the Balance Sheet at old cost Last In First Out Method (LIFO) Advantages

Takes into account the current market conditions Based on cost no unrealised profit Disadvantages Involves complicated calculations Not suitable for perishable goods LIFO method is suitable for goods which are of a bulky and non-perishable nature Difference between LIFO and FIFO Basis of Distinction 1.Basic Assumption 2.Cost of Goods sold FIFO Goods received first LIFO are Goods received last are issued

issued first first Cost of goods sold represents Cost of goods sold represents

cost of earlier purchases cost of recent purchases 3.Distortion in Balance B/S shows the ending B/S is distorted because sheet 4.Ending Inventory inventory at a value nearer ending inventory is the current market price understated at old cost Ending Inventory represents Ending Inventory represents cost of earlier purchases Lower income is reported

cost of recent purchases 5. In case of Rising Higher income is reported

Prices c) Weighted Average Price method- The weighted-average method relies on average unit cost to calculate cost of units sold and ending inventory. Average cost is determined by dividing total cost of goods available for sale by total units available for sale. d) HIFOHIFO is an inventory distribution method in which the inventory with the highest cost of purchase is the first to be used or taken out of stock. e) Specific Identification Method Specific identification of cost means that specific costs are attributed to identified items of inventory. This is an appropriate treatment for items that are segregated for a specific project, regardless of whether they have been purchased or produced. However, when there are large numbers of items of inventory which are ordinarily interchangeable, specific identification of costs is inappropriate. Stock Valuation-Stock is valued at lower of the cost or market price.

7) Stock Audit-Physical verification of stock may be periodic or continuous. The second system is better than the first one.

Techniques of Inventory control

ABC Analysis This technique of inventory control is also known as Always Better Control technique. ABC analysis is an analytical method of control which aims at concentrating efforts on those areas where attention is needed most. This is a principle of selective control. The emphasis of ABC analysis technique is that the management should concentrate its energy in controlling those items that mostly affect the organisational objects. Manufacturing concerns find it useful to group the materials into three classes on the basis of investment involved. Materials having higher values but constitute small percentage of total items, are grouped in 'A' category. On the other hand, a large percentage of items of materials which represent a smaller percentage of the values, are grouped in 'C' category. Items of materials having moderate value 'and moderate size are grouped in 'B' category. After the items of materials are classified into A, B and C category, control can be exercised in a selective manner as follows: (i) Greater care and strict control should be exercised on the items of category 'A' as any loss or breakage or wastage of any item of this category may prove to be very costly. Economic order quantity and re-order level should be carefully fixed for such category of items. (ii) Moderate and relaxed control is required for the items of category 'B'. (iii) There is not much need for exercising control over the items of category 'C' Periodic or annual verification is required for this category of materials. Advantages of ABC Analysis:

The advantages of ABC analysis are given below:' Close and strict control of costly items is ensured. Investment in inventory can be regulated and funds can be utilised in the best possible way. Economy is achieved in respect of stock carrying cost. It helps to keep enough safely stock for 'C' category items. Clerical cost can be reduced and inventory is maintained at optimum level. Scientific and selective control helps in maintenance of high stock turnover rate. Inventory Turnover Ratio Every firm has to maintain a certain level of inventory of finished goods so as to be able to meet the requirements of the business. But the level of inventory should neither be too high nor too low. A too high inventory means higher carrying costs and higher risk of stocks becoming obsolete whereas too low inventory may mean the loss of business opportunities. It is very essential to keep sufficient stock in business. Stock turn over ratio and inventory turn over ratio are the same. This ratio is a relationship between the cost of goods sold during a particular period of time and the cost of average inventory during a particular period. It is expressed in number of times. Stock turn over ratio/Inventory turn over ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio indicates whether investment in stock is within proper limit or not. The ratio is calculated by dividing the cost of goods sold by the amount of average stock at cost. Inventory Turnover Ratio = Cost of goods sold / Average inventory at cost

For example cost of goods sold is $500,000. The opening stock is $40,000 and the closing stock is $60,000 (at cost). Calculate inventory turnover ratio Inventory Turnover Ratio (ITR) = 500,000 / 50,000* = 10 times This means that an average one dollar invested in stock will turn into ten times in sales Just In Time (JIT) inventory system Just In Time (JIT) is a production and inventory control system in which materials are purchased and units are produced only as needed to meet actual customer demand. When Companies use Just in Time (JIT) manufacturing and inventory control system, they purchase materials and produce units only as needed to meet actual customers demand. In just in time manufacturing system inventories are reduced to the minimum and in some cases are zero. JIT approach can be used in both manufacturing and merchandising companies. It has the most profound effects, however, on the operations of manufacturing companies which maintain three class of inventories-raw material, Work in process, and finished goods. Traditionally, manufacturing companies have maintained large amounts of all three types of inventories to act as buffers so that operations can proceed smoothly even if there are unanticipated disruptions. Raw materials inventories provide insurance in case suppliers are late with deliveries. Work in process inventories are maintained in case a work station is unable to operate due to a breakdown or other reason. Finished goods inventories are maintained to accommodate unanticipated fluctuations in demand. While these inventories provide buffers against unforeseen events, they have a cost. In addition to the money tied up in the inventories, expert argue that the presence of inventories encourages inefficient and sloppy work, results in too many defects, and dramatically increase the amount of time required to complete a product. Under ideal conditions a company operating at JIT manufacturing system would purchase only enough materials each day to meet that days needs. Moreover, the company would

have no goods still in process at the end of the day, and all goods completed during the day would have been shipped immediately to customers. As this sequence suggests, "just-intime" means that raw materials are received just in time to go into production, manufacturing parts are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers.