What methods, document, and approvals are used to control materials inventories?

The more common methods of costing materials issued and inventories are:

(1) First-in, first out (FIFO)

(2) Average cost

(3) Last- in, first out (LIFO)

(4) Other methods-such as market price at date of issue or last purchase price, and standard cost.

(1) First-in, first out (FIFO)

The method assumes that materials are issued from the oldest supply in stock and that the cost of those units when placed in stock is the cost those same units when issued. However (FIFO) costing may be used even though physical withdrawal is in a different order. Advantages claimed for the (FIFO) costing method are:

  • Materials used are drowning from the cost records in a logical and systematic manner.
  • Movement of materials in a continuous, orderly, single-LIFO manner represents a condition necessary to and consistent with efficient materials control, particularly for materials subject to deterioration, decay and quality or style changes.
  • The (FIFO) method is recommended whenever
  • The size and cost of materials units are large,
  • Materials are easily identified as belonging to a particular purchased lot, and,
  • Note more than two or three different receipts of the materials are on a materials card at one time.

(2) Average cost method.

Average costing may be used even though the physical withdrawal is in an identifiable order. If tend to be made up of numerous small items low in units cost and especially if price are subject to frequent change, average costing is advantageous because:

  • It is a realistic costing method useful to management in analyzing operating results and appraising future production.
  • It minimizes the effect of unusually high or low materials price, there by making possible more stable cost estimates for future work.
  • It is a practical and less expensive perpetual inventory system.

(3) Last- in, First- out (LIFO)

The Last- in, First- out (LIFO) method of costing materials issued is based on the premise that materials units issued should carry the cost of the most recent purchase, although the physical flow may actually be different. The method assumes that the most recent cost (the approximate cost of replace the consumed units) is most significant in matching cost with revenue in the income determination process.

Under LIFO procedure the objective is to change the cost of current purchases to work in process, or other operating expenses and to leave the oldest costs in the inventory.

(4) Other methods-such as market price at date of issue or last purchase price, and standard cost.

(Market price at date of issue or last purchase price).

This procedure substitute replacement cost for experienced or consumed cost and has the virtue of charging materials into production at a current and significant cost. This method of materials costing and that of using the last purchases price are often used for small, low priced items.

  • Standard cost.
  • This method charges issued materials at predetermined or estimated cost reflecting a normal or an expected future cost. Receipt and issued of materials recorded in quantities only on the material ledger card or in the computer data bank, there by simplifying the record keeping and reducing clerical or data processing cost.
  • To plan manufacturing requirement, every stock item or class of items must be analyzed periodically to:
  • Fore cast demand for the next month, quarter, or year.
  • Determine acquisition lead time.
  • Plan usage during the lead time.
  • Establish quantity on hand.
  • Place units on order.
  • Determine reserve or safety stock requirement.