Question

In: Accounting

Summarize the cost flow methoda used under each system.

Summarize the cost flow methoda used under each system.

Solutions

Expert Solution

COST FLOW METHODS:-

The methods of pricing values under the cost flow method (cost price method) are classified as follows:-

  1. Specified Price
  2. First-in-first-out(FIFO)
  3. Last-in-last-out(LIFO)
  4. Highest-in first-out(HIFO)
  5. Base stock

ABOVE COST PRICE METHODS IN DETAIL:-

1. Specified price (identifiable) method:-

  • Sometimes materials are purchased to be utilised in a particular job or issues can be identified with a particular receipt.
  • In these cases, the actual purchase price can be charged.
  • This method can be adopted when prices are stable or when the materials are covered by price control orders.
  • This method has limited application only.

2. First-in-first-out(FIFO):-

  • This is the method which is based on the assumption that materials which are purchased first are issued first.
  • It uses the price of the first batch of materials purchased for all the issues until all units from this batch have been issued.
  • In other words,the materials are issued at the oldest cost price listed in the stores ledger account and thus,the materials in stock are valued at the price of the latest purchases.
  • It should be noted that the assumption of the flow of cost,though normally materials would be expected to move out of stock on approximately a FIFO basis because oldest stocks are usually used up first.

Example of FIFO:-

Receipts:

20th oct. 500kgs. @$5.00per kg.

23rd oct. 250kgs.@ $5.50per kg.

  Issues

25th oct.Issue of 600kgs.will be valued as follows:

500kgs.@$5 per kg.

100kgs.@$5.50 per kg.

3.Last-in-First-out(LIFO):-

  • In this method,the principle adopted is that the materials used in production is from the latest purchase.
  • The inventory is priced at the oldest costs.
  • As the method applies the current cost of materials to the cost of units,it is also known as the replacement cost method.
  • It is the most significant method in matching cost with revenue in the income determination procedure.

Example of LIFO:-

Receipts

20th oct. 500kgs.@ $5.00 per kg.

23rd oct. 250kgs.@ $5.50 per kg.

Issues

25th oct. Issue of 600kgs. will be valued as follows:

250kgs @ $5.50 per kg.

350kgs @ $5.00 per kg

4.Highest-in-first-out(HIFO)method:-

  • The principle adopted is that costliest materials are issued first.
  • Inventory is valued at the lowest possible price.
  • This method requires detailed records.
  • It is mainly used for monopoly products or cost plus contracts.When stocks are undervalued, a secret reserve is created.

5.Base Stock Method:-

  • A certain minimum stock of a material is always carried and is priced at the original cost (usually at the lowest purchase price).
  • The portion of stock above this level is issued and priced under any one of the methods.
  • The disadvantages of this method is that the stock may be under valued and hence the computation of return on capotal will not be reliable.

Related Solutions

Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item were available for sale during the calendar year: Jan. 1 Inventory 10,000 units at $75.00 Mar. 18 Sale 8,000 units May 2 Purchase 18,000 units at $77.50 Aug. 9 Sale 15,000 units Oct. 20 Purchase 7,000 units at $80.25 The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of goods sold for each sale and the inventory...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item were available for sale during the calendar year: Jan. 1 Inventory 30,000 units at $30.00 Mar. 18 Sale 24,000 units May 2 Purchase 54,000 units at $31.00 Aug. 9 Sale 45,000 units Oct. 20 Purchase 21,000 units at $32.10 The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of merchandise sold for each sale and the inventory...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item were available for sale during the calendar year: Jan. 1    Inventory    30,000 units at $30.00 Mar. 18    Sale    24,000 units May 2    Purchase    54,000 units at $31.00 Aug. 9    Sale    45,000 units Oct. 20    Purchase    21,000 units at $32.10 The firm uses the weighted average cost method with a perpetual inventory system. Determine the...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item...
Weighted Average Cost Flow Method Under Perpetual Inventory System The following units of a particular item were available for sale during the calendar year: Jan. 1 Inventory 4,000 units at $40 Apr. 19 Sale 2,500 units June 30 Purchase 4,500 units at $44 Sept. 2 Sale 5,000 units Nov. 15 Purchase 2,000 units at $46 The firm uses the weighted average cost method with a perpetual inventory system. Determine the cost of goods sold for each sale and the inventory...
Why are different inventory cost methods used in regards to cost flow and goods flow?
Why are different inventory cost methods used in regards to cost flow and goods flow?
describe the flow of manufacturing cost in a Job Order Cost System.
describe the flow of manufacturing cost in a Job Order Cost System.
Cost behavior is the term used to summarize the impact of costs that are influenced by...
Cost behavior is the term used to summarize the impact of costs that are influenced by volume. On a financial statement, these costs are identified as variable costs. Understanding the role of both fixed and variable costs in a health care organization is key to targeting profitability centers. Assume the role of a financial consultant. You have been hired by a small non-profit hospital, struggling with profitability. You have been given full access to all financial and operational information to...
Cost behavior is the term used to summarize the impact of costs that are influenced by...
Cost behavior is the term used to summarize the impact of costs that are influenced by volume. On a financial statement, these costs are identified as variable costs. Understanding the role of both fixed and variable costs in a health care organization is key to targeting profitability centers. Assume the role of a financial consultant. You have been hired by a small non-profit hospital, struggling with profitability. You have been given full access to all financial and operational information to...
summarize chapter 2. THE MARKET SYSTEM AND THE CIRCULAR FLOW. BY MCCONNELL BRUE FLYNN. MACROECONOMICS
summarize chapter 2. THE MARKET SYSTEM AND THE CIRCULAR FLOW. BY MCCONNELL BRUE FLYNN. MACROECONOMICS
1. Summarize the four inventory cost flow assumptions. How does LMC work?
1. Summarize the four inventory cost flow assumptions. How does LMC work?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT