Inventory cost The term Inventory includes (I) Stock of raw materials, (ii) Stock of work-in-progress, and (iii) Stock of finished Goods. The computation of the cost of inventory is also a tedious process. The vaftiation of tbe stock of raw materials will depend upon the method of pricing materials issues followed by the business. Materials may be issued to production according to First In First Out ([FIFO) Method, Last In First Out (LIFO) Method, Weighted Average Price Method, etc. In each of these cases, the value of the inventory of raw materials may widuly differ. This will be clear with the help of the following example.
A business buys raw materials in two different lots. In the first lot 1,000 units are purchased @ Rs 10 per unit. In the second lot, 2,000 units are purchased @ Rs 12 per unit. In case the stock of raw materials at the cod of the accounting period is of 1,000 units, the value of the inventory according to each of the methods stated above will be as follows:
1,000 Units @ Ps 12 per unit = Rs 12,000
(Since materials first purchased will be taken to have been issued to production first of all, the inventory of raw material will, therefore, consist of latest purchases).
(Since materials purchased in the last will be taken to have been issued to production first of all, the inventory will, therefore, consist of the earliest purchases).
Weighted Average Price Method:
1,000 Units @ Ps 11.333 = Rs 11,333
(The total units purchased are 3,000 for a total cost of Es 34,000. This gives a
weighted average priceRs 11.333 per unit).