COST ACCOUNTING: ACC321

MATERIAL COSTING
STORES LEDGER CARD
This is the key to an effective materials control system as it provides the details necessary to
ascertain material values and for the checking of physical stock of materials.
MATERIALS PRICING
There are a number of factors to be considered in valuing materials issued for use from the store.
Where purchase prices are constant over a long period and there is no variation in quantities
purchased, there would be little or no difficulty. In practice, prices fluctuate due to a number of
reasons. Such reasons are: Inflation; changes in world commodity prices, buying from different
sources, differences in quantity discounts, etc. It is clear that there may be a number of identical
materials in the store bought at different prices. When one of these materials is issued, it is
necessary to determine the price at which it should be charged.
The closing stocks of finished goods, work-in-progress, raw materials, etc need to be valued for
reflection in the balance sheet, as a current asset. A material pricing or valuation method has to
be used for the determination of the value of closing stock of different forms of materials.
Materials pricing is, therefore, not just about the value of materials issued to the store.
There are many methods of pricing or valuing materials. The most popular method are hereby
discussed Statement of Accounting Standards (SAS) No. 4, on Stocks recommends valuation
methods like First-In-First Out (FIFO); Weighted Average (WA), Last-In-First-Out (LIFO), for
use by businesses. The standard, however, lays more emphasis on three methods. These are:
(a) First-In-First-out (FIFO)
(b) Last-In-First-Out (LIFO)
(c) Weighted Average Price (WAP)
First-In-First-Out (FIFO)
This method assumes that the materials are used up in the same sequence as they are purchased,
that is, the older materials must have been used up first. FIFO is most suitable where the material
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is of comparatively high value and not in frequent demand. It is also appropriate where there are
relatively few changes in purchase prices, or where the ratio of the number of issues to the
number of receipts is not large. During an inflationary period, the cheapest materials will be
issued first, whereas during a deflationary period, it is the most expensive material that would be
the first to be issued out. This is so because in the inflationary period, the first batch of materials
will be underpriced while in the deflationary period, the first batch of materials will be
overpriced.
ADVANTAGES OF FIFO METHOD OF PRICING
(a) It is easy to operate.
(b) The value is based on cost and so no profits or losses will arise.
(c) The stock balance will represent a fair commercial valuation of stock.
(d) The method ensures that older materials are issued out first.
(e) The method is accepted for accountancy and taxation purposes.
DISADVANTAGES FIFO METHOD OF PRICING
(a) It is cumbersome, at times, to apply.
(b) The price of issued materials may not reflect current economic value.
ILLUSTRATION ONE
ABC Ltd recorded the following transactions in respect of a particular materials for the period
ending December, 2004
Units
October 2, opening stock
10,000 valued at N390,000
October Purchases
15,000 @ N42 per unit
November

20,000 @50 per unit

December

40,000 @55 per unit

October
Issues
17,000
November

23,000
December

30,000
You are required to prepare stock Ledger Account (Card) for the materials using FIFO pricing
method.

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SOLUTION TO ILLUSTRATION ONE

A. FIFO STOCK LEDGER ACCOUNT FOR THE PERIOD ENDING DECEMBER, 2004
Date
Receipt
Issues
Balance
Qty
Pr
Amt
Qty
Pr
Amt
Qty
Pr
Amt
2004
(N)
(N)
(N)
(N)
(N)
(N)
Oct
10,000
390,000
Oct 15,000 42
630,000
25,000
1020,000
Oct
10,000
39
390,000
7,000
42
294,000
17,000
684,000 8,000
336,000
Nov 20,000
50
1,000,000 28,000
1,336,000
Nov 8,000
42
336,000
15,000
50
750,000
23,000
1,086,000 5,000
250,000
Dec 40,000
55
2,200,000 45,000
2,450,000
Dec 5,000
50
250,000
25,000
55 1,375,000
30,000
1,625,000 15,000
825,000

LAST-IN-FIRST-OUT (LIFO)
This method ensures that the most recently purchased materials will be the first to be issued and
are always issued at actual cost. The method is used to relate cost, as closely as possible, to
current price levels.
ADVANTAGES LIFO METHOD OF PRICING
(a) It is simple to operate
(b) The Profit figures reported reflect more stability of what makes accounting information a
better guide to the management.
(c) The cost charged to production is closely related to current price level.
DISADVANTAGES OF LIFO METHOD OF PRICING
(a) It involves considerable clerical work.
(b) The valuation of stock balance may not be accepted for income tax purposes.
(c) Using stock valuation on the oldest materials in the store may present a false working capital
position in the balance sheet.
(d) It cannot be fairly used for the purpose of comparing job costs.
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ILLUSTRATION TWO
EFG Ltd recorded the following transactions in respect of a particular materials for the period
ending December, 2004
Units
October 2, opening stock
10,000 valued at N390,000
October Purchases
15,000 @ N42 per unit
November

20,000 @50 per unit

December

40,000 @55 per unit

October
Issues
17,000
November

23,000
December

30,000
You are required to prepare stock Ledger Account (Card) for the materials using LIFO pricing
method.
SOLUTION TO ILLUSTRATION TWO
B. LIFO STOCK LEDGER ACCOUNT FOR THE PERIOD ENDING DECEMBER, 2004
Date
Receipt
Issues
Balance
Qty
Pr
Amt
Qty
Pr
Amt
Qty
Pr
Amt
2004
(N)
(N)
(N)
(N)
(N)
(N)
Oct
10,000
390,000
Oct 15,000 42
630,000
25,000
1020,000
Oct
15,000
42
630,000
2,000
39
78,000
17,000
708,000 8,000
312,000
Nov 20,000
50
1,000,000 28,000
1,312,000
Nov 20,000
50
1,000,000 3,000
39
117,000
23,000
1,117,000 5,000
39
195,000
Dec 40,000
55
2,200,000 45,000
2,450,000
Dec 30,000
55 1,650,000 15,000
745,000

WEIGHTED AVERAGE PRICE (WAP)

This is a method whereby the ruling price (WAP) is determined by dividing the total cost of
materials in the store by the total quantity of materials in the store. This method is quite different
from the others (FIFO and LIFO) in that for every receipt, there is the need to arrive at a new
ruling price.

ADVANTAGES WAP METHOD OF PRICING

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(a) It evens out fluctuations in the price of materials.

(b) The use of the method is not limited to materials with stable prices.
(c) The need to calculate a new ruling price arises only with new receipt of stock.
(d) It presents a fair indication of stock values.
DISADVANTAGES WAP METHOD OF PRICING
(a) It is difficult to operate.
(b) Ruling prices usually run to a number of decimal places.
(c) Issues to production and other uses may not reflect current economic values.
ILLUSTRATION THREE
IJK Ltd recorded the following transactions in respect of a particular materials for the period
ending December, 2004
October 2, opening stock
October Purchases
November

December

October
Issues
November

December

Units
10,000 valued at N390,000
15,000 @ N42 per unit
20,000 @ N50 per unit
40,000 @ N55 per unit
17,000
23,000
30,000

You are required to prepare stock Ledger Account (Card) for the materials using Weighted
Average pricing methods.
SOLUTION TO ILLUSTRATION THREE
WEIGHTED STOCK LEDGER ACCOUNT FOR THE PERIOD ENDING DECEMBER,
2004
Date
Receipt
Issues
Balance
Qty
Pr
Amt
Qty
Pr
Amt
Qty
Pr
Amt
2004
(N)
(N)
(N)
(N)
(N)
(N)
Oct
10,000
390,000
Oct 15,000 42
630,000
25,000 40.8
1,020,000
Oct
17,000
40.80* 693,600 8,000 40.8
**326,400
Nov 20,000
50
1,000,000
28,000
1,326,400
Nov 23,000 47.371429
1,089,510 5,000 47.371429 236,890
Dec 40,000
55
2,200,000 45,000
2,436,890
Dec 30,000 54.153111 1,624,500 15,000 54.153111 812,297

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Working Notes:
Weighted average price = cost of materials received or outstanding in store
Quantity received or outstanding in store
1. Determination of Issue price
N1,020,000 = N40.80*
25,000
2. Determination of new cost of material
8,000 x 40.80 = 326400**

ILLUSTRATION FOUR: WORKINGS IN THE CLASS

Unilever Limited purchased the following articles:
2003 Jan. 1 2000 units @ N100 each
Feb. 4 1500 units @ N125 each
April 21 3000 units @ N150 each
Issues were made from the store as follows:
Jan. 10 800 units
Feb. 15 1000 units
March 30 600 units
April 30 2000 units
You are required to prepare the Stores Ledger Account of the company, using FIFO, LIFO AND
WEIGHTED AVERAGE method of Stock Valuation to determine the closing stock as at 30
April, 2003
SOLUTION TO ILLUSTRATION FOUR: WORKINGS IN THE CLASS

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