Materials costs
As part of a costing exercise there may be a need to determine the materials cost for a product or unit. This is fairly straightforward if the price of materials is constant but if prices vary, then assumptions need to be made for costing purposes.
There are three main assumptions or costing approaches used in practice:
- First in first out (FIFO)
- Last in first out (LIFO)
- Weighted average
FIFO
Basic idea
- Assumes that materials are issued out of inventory in the order in which they were delivered into inventory.
- Appropriate for many businesses (e.g. retailer selling fresh food using sell-by date rotation techniques).
Features of FIFO
LIFO
Basic idea
Assumes that materials are issued out of inventory in the reverse order to which they were delivered. Uncommon but appropriate for a few businesses- e.g. a coal merchant who stores coal inventories in a large 'bin'.
Features of LIFO
Cumulative Weighted Average
Basic idea
- All issues and inventory are valued at average price.
- The average price is recalculated after each receipt.
- Could be appropriate for businesses such as oil merchant, where deliveries in are fully mixed in with existing inventory.
Features of Cumulative Weighted Average
Ordering and issuing inventory
The practicalities of ordering and issuing inventory can be found here.
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Created at 6/28/2012 2:35 PM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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Last modified at 11/14/2012 11:41 AM by System Account
(GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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