c) LIFO Last in First Out

This method is based on the assumption that the last

materials purchased are the first materials issued.
Thus, the price of the last batch of the materials
purchased is issued first for all issues until all units from
this batch have been issued.
It may be noted that the physical flow of material may
not confirm to LIFO assumption.

LIFO - Illustration

Receipts
Issues
Balance
Quanti
Amoun Quanti
Amoun Quanti
Amoun
Date ty
Rate t
ty
Rate t
ty
Rate t
1

500
20 10000
4
400
21
8400

500
20 10000

400
21
8400
6

400
21
8400

200
20
4000
300
20
6000
8
800
24 19200

300
20
6000

800
24 19200
9

500
24 12000
300
20
6000

300
24
7200
13

300
24
7200
300
20
6000
24
500
25 12500

300
20
6000

500
25 12500
28

400
25 10000
300
20
6000

100
25
2500

d) HIFO Highest in first out

According to this method, the closing inventory should
be valued at the lowest possible price.
Material purchased at the highest prices are treated as
being first issued irrespective of the date of purchase.

e) Base Stock method

The method is based on the contention that each
enterprise maintains at all times a minimum quantity of
materials or finished goods in its stock. This quantity is
termed as base stock.
This base stock is valued at original cost. The stock in
excess of this figure would be treated in accordance
with FIFO or LIFO.

a) Simple Average Method

Simple average is calculated by adding all the different prices
of materials of the stock, from which the materials to be
priced could be drawn, by the number of prices used in that
total. Quantity is not considered in this.
For example: The following three lots of materials are in stock
when material is to be issued:
500 units purchased @Rs 20
200 units purchased @ 21
700 units purchased @ 22
Simple Average Price = 20+21+22 = Rs 21
3

Illustration - Simple Average Method

Receipts

Date

Quantity Rate
1
4

400

Issues
Amou Quant
nt
ity
Rate

Balance
Amou Quant
Amou
nt
ity
Rate nt

21

800

500

20 10000

8400

500

20 10000

400

21

600

24 19200

500

13

300

24
28

500

25 12500

20.5 12300

22.5 11250
24

400

7200

24.5

9800

8400

300

6100

1100

25300

600

14050

300

6850

800

19350

400

9550

b) Weighted Average Price Method

This method gives weightage to the quantities held at

each price when calculating the average price.

Illustration Weighted Average method

Receipts
Issues
Balance
Quantit
Amoun Quanti
Amou Quan
Amou
Date y
Rate t
ty
Rate nt
tity
Rate nt
1
4

400

6
8

21

800

500 20.00 10000

8400

900 20.44 18400

24 19200

600 20.44 12266

300 20.44 6133

1100 23.03 25333

500 23.03 11515

600 23.03 13818

13

300 23.03 6909

300 23.03 6909

24
28

500

25 12500

400 24.26 9704

800 24.26 19409

400 24.26 9704

c) Periodic Simple Average

In cost accounting, where jobs may be prepared monthly
or quarterly, it may be necessary to price materials issued
by taking the average price ruling during that period.
Periodic simple average = Total
during the period

of purchase prices

No. of prices during the period

The price of the opening stock does not enter the
computation of average price.
This method is similar to simple average method except
that it covers the prices of purchases made during that
period.

d) Periodic Weighted Average

Periodic weighted average price = Total Cost of materials

purchased
Quantity purchased

Normal Price methods - a) Standard Price

Standard price is a pre-determined price which is fixed for a

definite period. This method charges materials issued into
the factory at a predetermined budget or estimated price
reflecting a normal or an expected future price.
A standard price is fixed for each class of materials in
advance.

b) Inflated Price

This method includes carrying costs, cost of contingencies

and also losses arising out of evaporation and shrinkage etc.

This method aims to cover the full cost of materials

purchased.

c) Replacement Price method

Replacement price is the price at which materials would

be replaced .i.e the market the market price on the date
of issue. This method is used
reflect the current prices in cost.

when it is desirable to

ECONOMIC ORDER QUANTITY (EOQ)

Economic Order Quantity (EOQ) is the most optimum
quantity which should be purchased each time the
purchases are to be made.

2 AC O
EOQ = IC
Where AC = Annual consumption in units
O = Ordering Cost per unit
C = Cost per unit of material
I = Percent cost of carrying inventory

Two types of cost:

a) Ordering cost: This is the cost of placing an order
with the supplier. It mainly includes the cost of
stationery, salaries of those engaged in receiving and
inspection etc.
b) Carrying Cost: This
in storage. It includes
insurance cost etc.

is the cost of holding the stock

Cost of operating the stores,

At EOQ, ordering cost and carrying cost are equal.

Illustration
1. Estimated requirement for the year
Cost per unit
Ordering cost (per order)

600 units
Rs 20

Rs 12

Carrying cost (% of average inventory) 20%

2. The annual demand for a product is 6400 units.
Inventory carrying cost is Rs 1.50 per unit per annum. If
the cost of one procurement is Rs 75, determine
a) EOQ
b) No. of orders per year