Question

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a) Among all the stock valuation methods, four key methods of stock valuation are sometimes used by the organization, Fifo, Lifo, Weighted Average And Simple Average, explain how the application of each would differ using a company of your choice considering the nature of materials that form the basis of the stock in the selected company.

b) Using your choice of the company above and the nature of your stock, explain why there would difference in the closing stock values at the end of the period.

c) Stock management has always been an issue for many companies in terms of management, discuss ways through which pilferage can be managed, using two companies of your choice engaged in the production of perishable and no perishable stock items.   

Answer 1

The selection of method of costing would depend on number of factors one of the important factors is nature of materials. The application of each method would be different on the basis of nature of material as given below

· In case of retailing industries FIFO method would be more appropriate since the stock which is purchased first is issued to sales.

· In case of seasoning industries FIFO method would be more appropriate since the stock would need some time to be able to consume in production.

· When the material is perishable LIFO method is recommended since it helps in liquidation of items faster

· When there is wide fluctuation of prices based on different quantities of material purchased weighted average method is recommended

· Simple average method is recommended for firms that have many lots of purchase and where FIFO or LIFO application does not make difference to the inventory valuation or cost of goods sold

Company is Wrigley’s

b) The closing stock values will differ due to the following reasons

When prices are raising the closing inventory value is higher when FIFO method is used. LIFO gives highest closing inventory value when the prices are falling. The weighted average method and simple average method gives the stock value in between FIFO and LIFO method

c) Ways to manage pilferage

· Maintaining perpetual inventory system records

· Continuous reconciliation of physical stock and system stock

· Application of stock management and control techniques like ABC analysis and Pareto analysis. ABC analysis is classifying all items into A, B and C items based on 70:20:10 rule. Pareto analysis is classification of items based on 80:20 rule

· Installation of physical control measures for example: CCTV, checks at security gates.

· Holding employees accountable and responsible for pilferage as part of performance appraisal