What is Issue of materials? What is FIFO and LIFO Method?

What is Issue of materials?
What is Issue of materials? First-in-first-out Method (FIFO) and Last in First Out Method (LIFO)
What is Issue of materials? What  is  FIFO and LIFO Method?

Issue of materials

Materials are kept is stores so that the storekeeper may issue them whenever the production department requires these. A storekeeper cannot materials unless a properly authorized material requisition is presented to him.

i. Preparation and treatment requisition from

ii. Pricing of materials

Preparation and treatment of material requisition form

A material requisition is an important document of an authority to the storekeeper to issue the materials. It is a formal written request from production department to store. It is signed by the authorized person, so that there may be no wrong drawl of materials. It is prepared in triplicate. Two copies are sent to the store and one copy is sent to costing department. It includes date, requisition number, description, quantity, unit price, total value etc.

Meaning of perpetual inventory system

The perpetual inventory system is the way of maintaining the recorded of inventory in such a ways that the stock on hand can be ascertained at any time. It emphasizes the day to day checking of stocks and maintains the up to date record. It is a method of recording inventory after every receipt and issue to facilitate regular checking and obviate the stocktaking. It provides the stock control as we can easily find out and verify the level and position of stock lying in the store at any moment by physical counting. Some definitions of perpetual inventory system are given below.

"it is a method of recording stores balances after every receipt and issue, to facilitate regular checking and to obviate closing down for stock taking."

Perpetual inventory system helps to ascertain the balance of each and every stock in terms of physical quantity as well as monetary value held in store at time. For this, a company may maintain bin card, in which separate receipt and issue of material and balance of stock are recorded.

Methods of prancing material issued

When materials have been purchase for a specific product, the cost of materials received is wholly debited to that product. But, in general practice, materials are purchase for several products. If all purchase were made at the same price, there would be no problem in costing materials issued and in inventory valuation. But, purchase made at different times usually carries different prices and the stores ledger shows not one but several prices for the same kind o materials. Several methods are in use concerning the pricing of materials issued from the store. Following are the important methods of pricing material issued under perpetual inventory system.

• FIRST-IN-FIRST-OUT (FIFO) Method

• Last-In-First-Out (LIFO) Method

• Simple Average (SAM) Method

First-in-first-out Method (FIFO)

According to this method, materials received first are issued first. After the first lot of materials purchase is exhausted, the net lot is taken up for supply. The units in the opening stock of materials are treated as if they are issued first, the units units from the first purchase issue next, and so on unit the units left in the closing stock of materials are vaulted at the latest cost of purchases.

Advantages of FIFO Method

i. It is simple t understand and easy to use.

ii. It is applicable when price is falling.

iii. It is useful in case of less transaction and price of materials are fixed.

iv. It is logical because first received goods are first issued.

Disadvantages of FIFO Method

i. It is unsuitable in case of price is rising.

ii. It is complex if May lots are purchased during the period at different prices.

iii. This method increases the chances of clerical error.

iv. It is very hard to determine the value of the returned item.

Last in First Out Method (LIFO)

As the name LIFO, the use of inventory is valued on the basis of the inverse sequence of receipts. The LIFO method of costing is based on the principle that materials entering production are the part of the most recently purchased. It is assumed that the most recent cost, normally replacement cost is the most significant in matching cost with revenue in the income determination. Under this, the cost of the last lot of materials received is used to price material issued until the lot is finished, them the next lot pricing is used, and so on through coming lot, the closing stock is priced at the oldest prices.

Advantages  of LIFI Method

i. This method is simple to use.

ii. This method is applicable in case of rise in market price also.

iii. The valuations of stock have no role in profit or loss.

iv. In case of rising price, this method is more suitable.

Disadvantages of LIFO Method

i. This method is practically not better.

ii. In case of price of material is decreasing, it is not applicable.

iii. For determining the price, more than one has often to be adopted.

iv. This method can lead to clerical error because every time price has been changed.