So far we have encountered three stock adjustment processes
- Stock of raw materials
- Stock of W.I.P
- Stock of finished goods
In a costing situation, generally costs are determined at periodic intervals. Monthly costing is the best idea. A longer period may cause problem in product pricing.
At the end of the costing period, whatever inventories of raw materials remain, W.I.P & finished, they are called closing inventories. It is necessary to apportion a suitable cost to such inventories. Otherwise cost of sales will be unnecessarily overloaded.
Closing stocks which are remaining at the end of one period are carried to the next period as opening stocks.
Stock valuation is an essential phase of cost determination. This may be done following
- FIFO : First in first out
- LIFO : Last in last out
In FIFO, it is assumed that items of raw materials coming first are used first, items of W.I.P left in the process at the end of the last costing period have been sold first. This assumption is taken irrespective of the fact that physical movement of the stock may be in a different order.
In LIFO, it is assumed that items of raw materials coming fist are used last items of W.I.P left at the end of preceding costing period are completed last and items of finished good remained unsold in the last costing period are sold first. This is an obscure assumption. This formula should be avoided. Average method is rather a best approach. It is better to use weighed average method.
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