Cost  of  Inventory

Cost of inventory consist two element  a . Physical quantity  b. Unit cost    hence product of
these two give us total inventory  cost . Other costs that are  to be added to get actual inventory
cost  are  buying , freight ,storing  and receiving cost .

Methods  of  Inventory  Costing

There are several  methods to determine  the cost of inventories .The selection of a suitable
method  assumes  significance  in view of the fact that  it has direct bearing on  the cost of good
sold  and profit calculation .

Various method to calculate inventory  cost are

FIFO - First In First Out Method

The FIFO method

The FIFO method is based on assumption that material received first is consumed  in  
chronological order , those received first  are issued first  and value fixed accordingly .

Average Cost  Method

Average cost method takes  average cost of material  purchased which is added  into inventory  
till the new lots is purchased

LIFO  -  Last In First Out Method

The cost of inventory are finalised only at year end  along with  cost of good sold . The use of
inventory is valued in the inverse sequence  of receipts

Actual Cost method

Most of the companies follows these method to calculate the inventory .In this method  material
are issued  are priced at their actual price .

Base stock  price method

The base stock refers to minimum quantity of stock material that a firm has to maintain  at all
time .  Used in Industries  having long processing period  such as crude oil , hides etc

Standard price  method

Standard price are fixed for each material and material are issued on these prices . Normally
practiced in companies where bulk buying is done in advance and hence the standard price can
help them in benchmarking with actual price . The difference or the variance of price between
actual and standard price  shows the savings or excess  by the planned budget.

Market price method
The current  market  of material issued are gathered to get cost of inventory

More on  Manufacturing Costing

Product Costing
Material Cost
Labor Cost
Factory  Overhead Cost

Control on Inventory cost
Cost  of  material
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