Cost of Inventory
Cost of inventory consist two element a . Physical quantity b. Unit cost hence product of
these two give us total inventory cost . Other costs that are to be added to get actual inventory
cost are buying , freight ,storing and receiving cost .
Methods of Inventory Costing
There are several methods to determine the cost of inventories .The selection of a suitable
method assumes significance in view of the fact that it has direct bearing on the cost of good
sold and profit calculation .
Various method to calculate inventory cost are
FIFO - First In First Out Method
The FIFO method
The FIFO method is based on assumption that material received first is consumed in
chronological order , those received first are issued first and value fixed accordingly .
Average Cost Method
Average cost method takes average cost of material purchased which is added into inventory
till the new lots is purchased .
LIFO - Last In First Out Method
The cost of inventory are finalised only at year end along with cost of good sold . The use of
inventory is valued in the inverse sequence of receipts
Actual Cost method
Most of the companies follows these method to calculate the inventory .In this method material
are issued are priced at their actual price .
Base stock price method
The base stock refers to minimum quantity of stock material that a firm has to maintain at all
time . Used in Industries having long processing period such as crude oil , hides etc
Standard price method
Standard price are fixed for each material and material are issued on these prices . Normally
practiced in companies where bulk buying is done in advance and hence the standard price can
help them in benchmarking with actual price . The difference or the variance of price between
actual and standard price shows the savings or excess by the planned budget.
Market price method
The current market of material issued are gathered to get cost of inventory
More on Manufacturing Costing
Product Costing
Material Cost
Labor Cost
Factory Overhead Cost
Control on Inventory cost
Cost of material
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