Last In First Out (LIFO) (Part 2 or 3)

July 23rd, 2006 Comments off
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LIFO method assumes that the last items of stocks purchased are the first to be issued or sold. The valuation of closing stock is based on the cost of the earliest purchases.

Illustration:

In March 2006, assuming that there is no opening stock and the following reflects the stock movement:

Mar 2 Receipt 100 units @ $1.00 = $100.00

Mar 3 Receipt 150 units @$1.20 = $180.00

Mar 20 Receipt 200 units @$1.50 = $300.00

Mar 29 Issues 400 units

Compute the cost of material using LIFO to be charged to production and show the closing stock valuation in the Balance sheet?

Using the LIFO method:

(a) Cost assigned to the 400 units issued/charged to production is $530.00

200 units @$1.50=$300.00

150 units @$1.20=$180.00

50 units @$1.00=$ 50.00

400 units $530.00

(b) the closing stock of 50 units( total receipt(450) minus total issue(400)) under LIFO method will be valued at the price which is :

50 units @$1.00 =$50.00

The following are the advantages and disadvantage of LIFO method:

Advantages:

LIFO method keeps the cost of materials/stocks issued or charged to production closer to the current economic value.

Closing stock valuation is usually very conservative as it takes the oldest prices for the purchases of stocks.

Disadvantages:

Like FIFO, it is cumbersome

Closing Stock valuation is not acceptable by Inland Revenue

As the issue of stocks to production is opposite in direction to the usual practice of using the oldest stock purchased, it is not realistic.

Using the concept of issuing the most current stock/purchases might make store personnel becomes to complacent leading to older stock ageing and obsolescence.

Most accounting bodies have discourage or consider unacceptable the method used for LIFO

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Financial Accounting

 
 

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