Material and production values, or simply put, stocks of goods and raw materials
stocks make up the bulk of the assets of almost any enterprise. They
they also represent the bulk of the costs. In addition, their structure has a decisive influence on the financial results of economic activity.
As a rule, tangible assets are purchased in batches, arriving at the company’s balance sheet at different times and, accordingly, their price may not be the same.
After a while, capitalized inventories are transferred to production, sale or other disposal. At this point, it is very important for economists to correctly assess the value of the values issued.
Stock Valuation Methods
Currently, there are several ways to assess the cost of transferred material assets:
-
At the cost of each unit.
-
Weighted average cost.
-
At cost of the first at the time of the acquisition of material assets (FIFO).
-
At the cost of the last in time acquisition of material assets (LIFO).
When writing off, you need to remember that the same method will be used in tax accounting.
The right choice of method
As a rule, the procedure for writing off inventories is established by the company's internal policy. Moreover, different types of values can be written off by various methods. But for the same stock list, the method is unchanged.
In modern accounting, the first and second methods have become more widespread.
FIFO and LIFO cause a lot of questions among economists and business leaders. However, not taking them into account would be a serious omission.
For example, the FIFO method is a great opportunity to increase the image of an enterprise in the eyes of partners. The calculation of the cost of goods sold with its help is quite simple, you only need to understand the key points.
First in, first out
The first arrived, the first left, so in the translation from English four letters are decoded, which represent the FIFO method.
This is an assessment of the retired goods, based on the assumption that the first to be transferred to production (or for other purposes) are the values previously placed on arrival by others. That is, the goods are sold exactly in the order in which they arrived at the warehouse.
It’s easier to remember exactly what the FIFO method means using a household example. Imagine a large stack of anything. Let it be the applications of applicants to the selection committee of the university. Every day, stacks of blanks are placed on top of the stacks, but the lower ones will be considered first, as they were submitted earlier, despite the fact that a pile of new ones had accumulated over them. So the goods are first written off as those that arrived at the warehouse earlier than others with the same nomenclature.
Each batch of material and production values should be displayed as an independent group, if the FIFO method is subsequently applied to it. This condition is mandatory, even if goods of this nomenclature have been capitalized earlier.
When is the FIFO method applicable?
An example of the most successful use of this method is the cancellation of rapidly deteriorating goods. We are talking about food (vegetables, fruits, dairy products) or raw materials with a limited shelf life. In order to avoid damage, previously received stocks should be sold (or processed) first.
The disadvantages of the FIFO method
Since, due to the influence of inflation, purchase prices may rise over time, when using the FIFO method, the cost of goods sold may be somewhat underestimated. This contributes to the artificial overestimation of the financial results of economic activity and, as a consequence, an increase in the amount of income tax.
Advantages of the FIFO Method
Artificially high profit margins are the main plus that gives the company the FIFO method. This is surprising at first glance, because the same factor was recorded in the shortcomings. However, the great successes of the enterprise increase its creditworthiness and attractiveness when concluding new contracts and attracting investors.
FIFO Method. Solution example
There are two ways to calculate the value of inventories that are out of stock:
-
The total value of all stocks of a given nomenclature, capitalized at the warehouse for the entire period, is calculated, and the cost of material resources at the end of the reporting period is subtracted from it.
-
The calculation is based on the cost of a unit of goods in the first (by time) batch, if the stocks of this income do not fully cover the disposal, the cost of goods from the second, third batch is taken into account, etc.
A detailed study of both options will help a simple task.
The company receives the goods at the price of the supplier, and write-off from the warehouse is carried out according to the FIFO method.
At the beginning of the reporting period, 100 boxes of nails remained at the enterprise’s warehouse at a price of 300 rubles each. Total material assets in the amount of 30 000 rubles.
Within a month, two more consignments of nails were delivered to the warehouse at the following prices: 120 boxes of 400 rubles each and 200 boxes of 450 rubles each. In the same period, 180 boxes of nails were dropped from the warehouse for production purposes.
In accordance with the rules for writing off according to the FIFO method, we assume that 100 boxes of nails of 300 rubles each (in the amount of 30, 000 rubles) and 80 boxes of 400 rubles each (in the amount of 32, 000 rubles) were used up.
At the end of the month, 40 boxes of 400 rubles (in the amount of 16, 000 rubles) and 200 boxes of 450 rubles (in the amount of 90, 000 rubles) remain in the warehouse.
We perform the calculation using the first method. We calculate the average value of the remaining boxes in the warehouse:
(16, 000 + 90, 000) / (40 + 200) = 441.66 rubles.
The resulting value is multiplied by the quantity of goods in stock at the end of the reporting period:
441.66 * (40 + 200) = 105 998.40 rubles.
For simplicity of calculations, we round the resulting amount to 106, 000 rubles.
We calculate the value of the values left from the warehouse:
((100 * 300) + (120 * 400) + (200 * 450)) - 106 000 rubles = 62 000 rubles
Total for the reporting period, 180 boxes of nails for a total of 62, 000 rubles were left from the warehouse. Consequently, the average cost of one unit was 345 rubles.
Now, once again, we will calculate the cost of retired goods by applying the second method. In this case, the calculations will be simple and take less time.
100 * 300 + 80 * 400 = 62 000 rubles.
The cost of one dispensed unit also amounted to 345 rubles.
The results of the calculations are the same, and this proves that both methods are correct.
The specified example is quite simple, therefore, the calculation was simpler according to the second option. But, if you want to keep track of a large range of goods that have been sold and sold several times during the reporting period, the first option for calculating according to the FIFO method will come to the rescue.
