Inventory valuation Flashcards
What are the two methods of inventory valuation and when are they used?
First in first out (FIFO) and Last in first out (LIFO)
These methods are used to place a value on inventory issued to departments/jobs/customers and to value the closing inventory at the end of each month or year.
Describe First in first out.
With this method the price/value of the inventory issued is based on the assumption that the first inventory received is the first inventory issued (oldest to newest). Issues of inventory will be charged at the first price paid until all of that batch of inventory has been issued. Then the next batch will be issued at the price paid for that batch until all of that batch has been issued.
Give 4 advantages of using the FIFO method.
It is a logical method as goods will normally leave the business in date order-oldest to newest.
It is an easy method to operate and understand.
The balance of inventory is always a true and fair valuation as it is the most recent inventory purchased which is left.
It is accepted by the Inland Revenue for taxation purposes.
Give two disadvantages of FIFO.
Clerical errors may be made due to having to select inventory from different batches.
It is difficult to compare prices of jobs charged to customers as inventory for one job may have a different price to that the inventory of another job as it will come from different batches.
Describe Last in first out.
This method assumes that the last inventory received will be the first inventory issued. Each time a new batch of inventory is received the issue price changes until that batch is used up or a new batch is received.
Give two advantages of using Last in first out.
Inventory is issued to jobs or customers at the most recent prices.
The cost of inventory being issued is close to current market value and replacement costs.
Give two disadvantages of Last in first out.
The closing inventory value will be based on the oldest price paid which may not reflect current prices or values.
Clerical errors may be made as inventory is selected from different batches.
