chapter 7

Issues


When materials are issued to production the issues must be valued or priced. This is important because it will affect the cost of the product produced by the production department.

The problem in pricing material issues is to decide what price to use. There is no simple solution to the problem. To overcome the problem a number of methods were devised to price material issues. The CIMA recommends such methods as first in first out, last in first out, weighted average, standard price and replacement price. The company must decide the method that is most suitable after weighing all the facts involved.

The methods discussed are as follows:

First In First Out

The earliest materials purchased are used first until exhausted. Materials are issued in chronological order. The stock is valued at cost. When material prices fluctuate there may be a big difference in the price at which material is charged to production. In practice the physical method of issue follows the FIFO method. Materials issued on the same day may be priced at two different prices. This method is simple and easy to understand.

Last In First Out

The latest materials are used first or issued first. Stock is valued at cost but may be valued at outdated prices. During periods of rising prices the closing stock becomes undervalued. During periods of falling prices stock losses may have to be written off because the market value will be less than the book value. Materials are issued at prices that are closer to the current price levels. The charge to production will be closely related to current price levels.

Weighted Average

In this method the average price is used. The price is calculated by dividing the total cost of materials in the stock from which the material to be priced could be drawn, by the total quantity of materials in that stock. A new issue price has to be calculated each time new materials are received and not at the time when there is a new issue. This method evens out any fluctuations in the purchase price. The price paid for the material may not be used because the average price is used. The cost of new receipts is added to the value of the stock balance. The average price is found by dividing the new value with the new quantity.









Question

Darwisya Co. Ltd. makes the following purchases of material ‘X’ in the month of January.

Stock at beginning 1000 units at 1.00 each

March 10 purchased 2500 units at 1.10 each

15 issued 3000 units at 2.00 each

25 purchased 1500 units at 1.20 each

28 issued 1000 units at 2.20 each

31 purchased 500 units at 1.30 each

Use the FIFO, LIFO and weighted average methods of valuing stock.







































Question1

Beatrix Manufacturing Co. Ltd. Makes the following purchases of material ‘X’ in the month of January.

Jan 1 100 kg at RM1.50 per kg

5 100 kg at RM2.00 per kg

15 130 kg at RM2.40 per kg

29 150 kg at RM3.00 per kg

The issues made are:

Jan 10 80 kg

20 50 kg

25 100 kg

30 125 kg

Use the FIFO, LIFO and weighted average methods of valuing stock.

Question2

Irdina Ltd. uses material ‘Waz’ for the production purposes. The following information on material ‘Waz’ are available:

Purchases

March 1 100 kg at RM1.50 per kg

4 300 kg at RM1.56 per kg

11 150 kg at RM1.60 per kg

25 150 kg at RM1.70 per kg

Issues

March 5 80 kg

6 140 kg

18 130 kg

20 110 kg

29 140 kg

Use the FIFO, LIFO and weighted average methods of valuing stock.

Question 3

The stores information for the month of February is as follows:

Stock at beginning 500 units at 50 cents each

February 3 purchased 300 units at 55 cents each

10 issued 600 units

15 purchased 200 units at 60 cents each

20 issued 300 units

26 purchased 200 units at 65 cents each

Use the FIFO, LIFO and weighted average methods of valuing stock.



Question4

Castro Ltd. sells solar stoves. At 1st January, 19-9 it has stocks of 160 units valued at RM6,720. The transactions for January to June 19-9 were as follows:

January 160 units purchased at RM36.80 per unit

February 400 units purchased at RM39.50 per unit

March 400 units purchased at RM52.80 per unit

April 800 units purchased at RM42.00 per unit

May 560 units sold at RM56.00 per unit

June 400 units sold at RM60.00 per unit

Use the FIFO, LIFO and weighted average methods of valuing stock.