Last in First out | LIFO | Accounting for Materials | Cost Accounting

 

 

Material Issue Procedure

Material issue is carried out by the storekeeper.

The materials should be issued at the right time, in right quantity and of right quality.

For these purpose, every organization must follow an issue procedure.

All issues should be recorded in the bin card by the storekeeper and in the stores ledger by cost department. For the authorization of material issues, material requisition note is prepared.

 

Whenever, materials are required from the store, the supervisor or departmental head writes a material requisition note.

It is a formal request to issue the material.

It contains information about the description, code, quantity of material and job or work order etc.

Generally, a material requisition note is prepared in triplicate:

(a) One copy is for further reference.

(b) Second copy is for accounting section

(d) Third copy is for storekeeper.

 

At the time of materials issue, the storekeeper posts the requisition in the bin cards.

 

 

Last in First out (LIFO) Method

LIFO method is exactly the opposite of FIFO method.

Under LIFO method, the last purchased materials are issued first.

The issues materials are priced at the unit cost of the latest lot or the most recent purchases.

Closing stock is calculated at earliest purchase price.

Three points should be noted regarding this method:

Material issues at actual cost.

Material issues for production at the latest price.

The closing stock is valued at the oldest price; it does not represent the current market values.

 

Advantages of LIFO

The main advantages of LIFO are given below:

This method is easy to understand and simple to operate.

This method also does not have any unrealistic profit or loss.

Issue price shows current market rates which is more realistic.

This method is the most suitable when prices are rising.

 

Disadvantages of LIFO

The main disadvantages of LIFO are given below:

Two similar jobs cannot be compared due to different rates of materials charged for different jobs.

The closing stock is valued at the oldest price and does not represent the current market values.

This system is not accepted by tax department.

This method is not suitable when prices are decreasing.

 

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Special Transactions of FIFO and LIFO

Material returned to suppliers or vendor

In some cases, materials received from suppliers are returned to him because materials may be poor in quality or defective.

Such returned materials are recorded on issue column of the store ledger.

It decreases materials in store.

Under FIFO method, according to date, rate or latest purchase.

Under LIFO method, according to date, rate or latest purchase.

Under SAP method, according to average price.

 

Materials returned to stores

(Return from works, job or department)

Sometimes materials are returned to stores from production department along with materials returned note.

It is as an evidence document.

The materials returned may be unused or job cancels.

Such returned materials are recorded in receipts column of store ledger.

Under FIFO method, according to given date, rate or latest issue.

Under LIFO method, according to given date, rate or latest issue.

 

Shortage in materials

(Damaged, wastage or credit note)

Shortage means decrease in quantity.

It may be due to materials lost, damaged, shrinkage or evaporation.

The value of such material is irrecoverable.

It is recorded on the issue column of bin cards and store ledger.

It decreases materials in store. 

If date or rate is given, according to given date or rate.

Under FIFO method, according to earliest balance.

Under LIFO method, according to latest balance.

 

Surplus in materials

Materials surplus, excess or debit note

Surplus means excess in quantity. It may be due to counting mistake.

It increases materials in store. It is recorded on the receipt column of bin cards and store ledger.

If date or rate is given, according to given date or rate.

Under FIFO method, according to earliest balance.

Under LIFO method, according to latest balance.

 

Goods transfer from one department to other department

Sometimes goods are transferred from one department to other department.

It is normal work. Such as:

          Goods transferred from Department A to Department B

          Goods transferred from Job A to Job B

          Goods transferred from Works B to Works C

It does not affect in store ledger.

Therefore, No entry for this transaction.

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2A

ABC Manufacturing Company has following materials information:

Purchases of the month were:	Issued of the month were as follows:
Jan, 10       600 units @ Rs 10 per unit	Jan, 12       400 units
Jan, 15       900 units @ Rs 12 per unit	Jan, 18       1,000 units
Jan, 25       300 units @ Rs 15 per unit	Jan, 28       200 units

Required: Stores ledger for the month if materials were issued on last in first out principle.

[Answer: (100 + 100) = 200 units; Rs (1,000 + 1,500) = Rs 2,500]

SOLUTION:

Store Ledger under FIFO Method

Date	Particulars	Receipts			Issues			Balance
		Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs
Jan, 1	Opening balance									Nil
Jan, 10	Materials purchased	600	10	6,000				600	10	6,000
	Purchase No.
Jan, 12	Materials issued				400	10	4,000	200	10	2,000
	Requisition No.
Jan, 15	Materials purchased	900	12	10,800				200	10	2,000
	Purchase No.							900	12	10,800
Jan, 18	Materials issued				900	12	10,800
	Requisition No.				100	10	1,000	100	10	1,000
Jan, 25	Materials purchased	300	15	4,500				100	10	1,000
	Purchase No.							300	15	4,500
Jan, 28	Materials issued				200	15	3,000	100	10	1,000
	Requisition No.							100	15	1,500

 

Therefore,

Value of closing stock:	100 units @ Rs 10	=	1,000
	100 units @ Rs 15		1,500
	200 units	=	Rs 2,500

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2B

The following information related to materials of ABC Polymers (P) Ltd for the month of February:

Date	Receipts (in kg)	Rate per kg ($/₹/Rs)	Issue (in kg)
1 Feb	Opening balance 100	100	–
5 Feb	400	120	–
10 Feb	–	–	150
12 Feb	–	–	300
15 Feb	500	150	–
19 Feb	–	–	250
25 Feb	–	–	200
27 Feb	400	125	–
29 Feb	–	–	300

Required: Store Ledger account under LIFO method

 [Answer: Closing stock (50 + 50 + 100) = 200 units; Rs 25,000]

SOLUTION

Store Ledger under LIFO Method

Date	particulars	Receipts			Issues			Balance
		Qty	Rate	$/₹/Rs	Qty	Rate	$/₹/Rs	Qty	Rate	$/₹/Rs
1 Feb	Opening balance							100	100	10,000
5 Feb	Materials purchased	400	120	48,000				100	100	10,000
	Purchase No.							400	120	48,000
10 Feb	Materials issued				150	120	18,000	100	100	10,000
	Requisition No.							250	120	30,000
12 Feb	Materials issued				250	120	30,000	50	100	5,000
	Requisition No.				50	100	5,000
15 Feb	Materials purchased	500	150	75,000				50	100	5,000
	Purchase No.							500	150	75,000
19 Feb	Materials issued				250	150	37,500	50	100	5,000
	Requisition No.							250	150	37,500
25 Feb	Materials issued				200	150	30,000	50	100	5,000
	Requisition No.							50	150	7,500
27 Feb	Materials purchased	400	125	50,000				50	100	5,000
	Purchase No.							50	150	7,500
								400	125	50,000
29 Feb	Materials issued				300	125	37,500	50	100	5,000
	Requisition No.							50	150	7,500
								100	125	12,500

 

Therefore,

Value of closing stock:	50 units @ Rs 100	=	5,000
	50 units @ Rs 150	=	,500
	100 units @ Rs 125	=	12,500
	200 units	=	Rs 25,000

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2C

The following information is given by ABC Manufacturing Company on March: 

Receipt	March	1	500 units @ Rs 100
	March	5	1,000 units @ Rs 125
	March	12	1,500 units @ Rs 115
	March	21	1,200 units @ Rs 120
Issued	March	7	Issued 1,250 units
	March	15	Issued 1,600 units
	March	31	Issued 800 units
Return from Job	March	22	25 units issued  @ Rs 100
Shortage	March	28	10 units

Required: Store Ledger under LIFO method

Under LIFO: (175 + 390) = 565 units; Rs 64,300]

SOLUTION:

Store Ledger under LIFO Method

Date	Particulars	Receipts			Issues			Balance
		Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs
Mar 1	Purchase of materials	500	100	50,000				500	100	50,000
Mar 5	Purchase of materials	1000	125	125,000				500	100	50,000
								1000	125	125,000
Mar 7	Issued of materials				1,000	125	125,000
					250	100	25,000	250	100	25,000
Mar 12	Purchase of materials	1,500	115	172,500				250	100	25,000
								1,500	115	172,500
Mar 15	Issued of materials				1,500	115	172,500
					100	100	10,000	150	100	15,000
Mar 21	Purchase of materials	1,200	120	144,000				150	100	15,000
								1,200	120	144,000
Mar 22	Returned from Job	25	100	2,500				175	100	17,500
								1,200	120	144,000
Mar 28	Shortage in stock				10	120	1,200	175	100	17,500
								1,190	120	142,800
Mar 31	Issued of materials				800	120	96,000	175	100	17,500
								390	120	46,800

  

Therefore,

Value of closing stock:	175 units @ Rs 100	=	17,500
	390 units @ Rs 120	=	46,800
	565 units	=	Rs 64,300

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2D

ABC Manufacturing Company has following information on June:

June, 1	Opening balance of materials 1,500 kgs @ Rs 11,000 per quintal
5	Purchased 2,500 kgs @ Rs 12,000 per quintal
10	Issued 3,500 kgs.
11	Returned from production department 250 kgs
15	Issued 500 kgs.
20	Purchased 2500 kgs @ Rs 12,500 per quintal
22	Issued 1,000 kgs.
25	Returned to suppliers 250 kg (20 June)
30	Stock verification found 50 kgs as excess and adjusted.

Required: Store Ledger under LIFO method

[Answer:  Under LIFO: (250 + 1,300) = 1,550 units; Rs 193,000]

SOLUTION:

Given and working note:

One quintal = 100 kgs

Rate per kg = Amount ÷ 100

June 1        = Rs 11,000 ÷ 100        = Rs 110

June 2        = Rs 12,000 ÷ 100        = Rs 120

June 20      = Rs 12,500 ÷ 100        = Rs 125

June 30      = Rs 13,000 ÷ 100        = Rs 130

  

Store Ledger under LIFO Method

Date	Particulars	Receipts			Issues			Balance
		Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs	Qty.	Rate	$/₹/Rs
Jun, 1	Opening balance							1,500	110	165,000
5	Purchase of materials	2,500	120	300,000				1,500	110	165,000
								2,500	120	300,000
10	Issue of materials				2,500	120	300,000	500	110	55,000
					1,000	110	110,000
11	Return from Dpt	250	110	27,500				750	110	82,500
15	Issue of materials				500	110	55,000	250	110	27,500
20	Purchase of materials	2,500	125	312,500				250	110	27,500
								2,500	125	312,500
22	Issue of materials				1,000	125	125,000	250	110	27,500
								1,500	125	187,500
25	Returned to suppliers				250	125	31,250	250	110	27,500
								1,250	125	156,250
30	Surplus in store	50	125	6,250				250	110	27,500
								1,300	125	162,500

 

 

Therefore, value of closing stock:

	250 units @ Rs 100	=	27,500
	1,300 units @ Rs 120	=	162,500
	1,550 units		Rs 190,000

 

 

Keep in Mind (KIM) 

Materials returned from job on 25th March are from old stock; it is not from new purchase.

Therefore, it is recorded earliest than 500 units @ Rs 100 per unit. Because, it is purchased earliest.

Materials returned from job on 28th March are from old stock. It is not from new purchase.

Therefore, it is added with same rate of Rs 150 per unit. Because, it is from same lot.

 

 

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PROBLEMS  AND ANSWERS  OF  FIFO  AND  LIFO

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2A

The following information related to materials are given below:

Jan, 1	Opening balance of materials	300 units @ Rs 20 per unit
Jan, 3	Materials purchased	400 units @ Rs 25 per unit
Jan, 8	Materials issued as requisition No. 1	400 units
Jan, 12	Materials purchased	300 units @ Rs 28 per unit
Jan, 15	Materials issued as requisition No. 2	200 units
Jan, 21	Materials purchased	300 units @ Rs 30 per unit
Jan, 25	Materials issued as requisition No. 3	500 units
Jan, 31	Surplus in stock	5 units

Required: Store ledger for closing stock under LIFO method

[Answer: 205 units, Rs 4,100;

*Materials surplus @ Rs 20 per unit;

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2B 

The following information related to spare parts are given below:

Feb, 1	Opening balance of materials	500 units @ Rs 100 per unit
Feb, 5	Materials purchased lot No. 501	300 units @ Rs 120 per unit
Feb, 10	Materials issued	500 units
Feb, 15	Materials purchased lot No. 502	400 units @ Rs 125 per unit
Feb, 20	Materials issued	500 units
Feb, 25	Materials purchased lot No. 503	300 units @ Rs 140 per unit
Feb, 28	Materials issued	250 units
Feb, 28	Materials returned to vendor due to defects	20 units of lot No. 503

Required: Store ledger for closing stock under LIFO method

[Answer: (200 + 30) = 230 units;

Rs (20,000 + 4,200) = Rs 24,200]

*Returned to vendor @ Rs 140 per unit;

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country 

PROBLEM: 2C

The following materials information is given by BK Manufactures:

Date	Details	Rate
March, 1	Stock in hand 500 units	100
5	Received 1,000 units	125
7	Issued 750 units	–
10	Issued 250 units	–
12	Received 2,000 units	150
21	Issued 1,500	–
25	Returned from Job 20 units @ Rs 150
26	Received 2,000 units	140
28	Shortage in stock 25 units
31	Issued 2,500 units	–

Required: Value of closing stock under LIFO method

 [Answer: Closing stock LIFO: 495 units; Rs 49,500;

 

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