The following are the main pricing methods that may be used to determine the price of issues and closing stock valuation. Though this article is based on the FIFO method, the LIFO method and the Weighted Average Method (how to solve for gross profit) and also contains a video guide introducing you to this topic. Let’s begin with the methods of stock valuation.
Subscribe to our YouTube channel so as not to miss a tutorial video.
Methods of Stock Valuation
- Lifo method {last in first out}
- Fifo method {first in first out}
- Weighted average {WA}
- Simple average
- Replacement price
- Base stock
- Standard price
What is FIFO?
In Accounting, FIFO is an acronym for First-In, First-Out where issues are priced at the price of the oldest item of materials in store until all units of that batch have been issued when the price of the next oldest item is used and so on.
Advantages of FIFO
- It is based on actual costs.
- It is acceptable to standard accounting practice.
- It is easy to understand and simple to price the issues.
- It is acceptable to the board revenue department for tax purposes.
- The materials are valued at the most recent market prices.
Disadvantages of FIFO
- It is administratively clumsy.
- It does not reflect the prevailing market condition.
- In periods of inflation, product cost is understated and profit overstate, while in a deflationary period, product cost is overstated and profit understate.
- It renders cost comparison between jobs difficult as prices vary from batch to batch.
What is LIFO?
In Accounting, LIFO is an acronym for Last-In, First-Out where issues are charged out at the price of the most recent batch received. Continue to be charged until a new batch is received.
Advantages of LIFO
- It makes use of the actual cost for pricing purposes.
- Product cost is based on current prices which are being realistic.
- No profit or losses.
- It provides a hedge against inflation.
Disadvantages of LIFO
- It results in batches being only partly charged to production.
- Stock is valued at the oldest prices.
- It involves considerable clerical work.
- More than one price may have to be adopted for an issue.
The Weighted Average Method
The weighted average is one of the methods of stock valuation whereby the issue price is recalculated after each receipt taking into consideration both quantities and monetary value of the units that remain as balanced as the time of receiving the material.
Advantages of the Weighted Average Method
- It makes the cost comparison between processes and jobs easier.
- No unrealized profit of losses occurs.
- It is favored by the Inland Revenue Department for tax purposes.
- It is not as complicated as the LIFO and FIFO methods.
Disadvantages of the Weighted Average Method
- Stock valuation is slightly out of data with FIFO.
- Except care is taken it usually involves decimals.
- Issued may not be at current economic values.
- It is not an actual buying in price expected by coincidence.
Watch this Video Guide
This (Introductory) video will guide you on how to attempt questions on FIFO, LIFO, and the Weighted Average Methods.