Store ledger account
Valuation of Inventory Movements
It is necessary that all the possible movements of
material are valued properly and are expressed in terms of money. We will consider this problem under the following heads.
(1) Valuation of receipts
Valuation of receipts is relatively an easy task, as the invoice or bill received from the supplier of the material is available as a starting point. Following propositions should be considered for this purpose.
(A) valuation of the receipts. The trade discount is deducted from the basic price and all other amounts as billed by the supplier are added viz. Excise Duty, Sales Tax. Octroi Duty,Transport/Insurance charges etc. There are different opinions in respect of the treatment of cash discount. One opinion says that cash discount should be ignored being purely of financial nature while valuing the receipts, while another opinion says that it should be considered while valuing the receipt of the material.
(B)In some cases, more than one item of material
are included in one single bill and some costs are jointly incurred for all the items of material. Such joint costs may be distributed on the basis of basic price of the material.
(C) In case of the imported material, the cost of
the material consists of basic price (which may be stated in foreign currency and should be converted in Indian Rupees), Customs Duty, Clearing Charges. Transport Charges,Octroi Duty etc. In some cases, the point of receipt of imported material and the point of making the payment of invoice amount may be different. As such, rate of foreign currency may be different at the time of payment of customs duty and at the time of payment of invoice amount. In such cases, the rate of exchange existing at the time of making the payment of invoice amount should be considered for valuing basic cost of material imported.
(2) Valuation of Issues
This is a more complex process than the valuation of the receipts. It is because of the reason that the material may be issued out of the various lots which might have been purchased at various prices. As such, a problem may arise as to which of the receipt prices should be used to value thenmaterial requisition notes. Various methods may be used for this purpose, main of which may be discussed as below.
When material is issued from the store for some production work or to a particular department, then the problem of its valuation arises. The materials are brought to the store on different dates and they are also purchased at different prices, these materials are issued to the various departments for different purposes and it is then that the problem of valuation arises, what price should be treated as the base.for valuation, is the actual problem. Generally the following methods are used for valuation of materials
(1)Actual Cost Method
a.First In First Out (FIFO) Method
b.Last In First Out (LIFO) Method
c.Highest In First Out (HIFO) Method
d.Minimum in First Out (MIFO) Method
e.Base Stock Method
(2)Average Cost Method
(a)Simple Average Method
b.weighed average method
c.Market Price Method
d.Standard Price Method
e.Inflated Price Method
The above methods are explained in detail as follows
(1)Actual Cost Method- In this method, the valuation of the issued material is done on the basis of its actual purchase cost. The theory of finding out actual purchase cost is to find out what is the cost incurred on the material
which is to be used for production. In this way, to find out cost price of material, all those costs, or expenses are added which are incurred from purchase of the material to the time it is brought to the store, such as conveyance or transport,
labour, octroi, loading and unloading, insurance etc. Generally, commercial exemption is subtracted from purchase price, because it is not correct to consider commercial exemption
as a part of cost. The valuation of issued materials on the basis of actual cost price-method, can be done in the follow-
ing two ways.
a.First In First Out Method (FIFO)- Under this
method, the materials first received in the store are the first issued, i.e., the order in which the materials are received in the store are issued at their cost price in the same order. Thus, the FIFO method follows the principle that the materials received first are the ones that are issued first, and these are issued at the price at which they are purchased. After the stock of the first lot of material purchased finishes, the next lot is supplied and this is issued at the price at which it
has been purchased.
Advantages:
1.This method is simple. There is smoothness in the work of valuation under this method.
2.This method is scientific. In principle it is only proper that old material is issued first and that which is bought later is issued afterwards.
3.In this method, there is no possibility of loss of material due to spoilage or obsolescence.
4.The valuation done with the help of this method is correct, accurate and trustworthy.
Disadvantages:
1.When there are constant changes in the market price, then this method does not form a proper base for valuation.
2.The method is also not appropriate in businesses where purchase and issue of material is done many times, because every time the issued material will have to be valued at a different price, and accounting would have to be done each time.
3.It is very difficult to store separately, the material purchased at different prices and on different dates. By doing so a large portion of the store is occupied.
4.Some materials are such that they cannot be stored separately e.g., coal. In such cases, the method cannot be used.
5.Though many jobs are done together and at the same time, yet there can be a lot of difference in their production costs, because in this method, there is the possibility of the material issued for the different jobs being valuated at different prices.
(b) Last In First Out Method (LIFO)- In this
method, the materials that are purchased last are issued first and the material that is purchased first is issued at the end. The materials purchased last are issued first at the cost price.
The aim is to issue the fresh material for production as soon as it enters the store. According to principle, the material that
comes to the store last, will be issued first at the price at which it is purchased and similarly the material that came first will be issued afterwards at the price at which it was bought. In this
way, the material that was purchased first remains as balance stock at the end:
Advantages:
1.In this method, the material sent for production is fresh because the material that comes last is sent first for production.
2.In this method, because the material that comes at the end is issued first, the valuation of the material is done exactly at the time it is being used for production and hence the cost price is more accurate, correct and trustworthy.
Disadvantages
1.This method is contradictory in itself, In the valuation of materials received first is done later and the use of materials received later is done first under this method, which does not seem correct at all.
2.In this method, the material received first is issued in the end as a result of which there exists the possibility of materials received first getting spoilt.
3.Much space is needed for storing the material, because under this method it is necessary to store the materials purchased at different prices separately in different groups. This not only requires more space but also requires more labour and time.
4.Although many production jobs may be done together and at the same time, yet there is a possibility of difference in their cost of production because the material may be issued at different rates for different
jobs.
5.The use of this method does not show the correct position of the business, because the closing stock is priced at a very old price which does not show the correct position of the business in the balance sheet.
