Inventory Control

• Using First-In-First-Out (FIFO)
  
• Last-In-First-Out (LIFO)
  
• Average-Cost (AVCO)
  methods of inventory valuation

What are Inventories (Stocks)?

Materials held in business for the purposes of manufacturing, processing, sale or to render a service

Types of Inventory

• Inventory are also called ‘stock’
  
• Trading Organisations – Shops buy and sell items, therefore the goods are their inventories
  
• Service Organisations – use consumables, parts or components to render services
  
• Manufacturers: Businesses that manufacture products hold inventory in various form:
  - Raw material – are materials bought by a manufacturing business and are ready to be transferred to the production area to make finished goods
  - Work in Progress – are part-finished products awaiting for completion
  - Finished Goods – are products ready for sale

Typical Examples in business:

• Manufacturing
  
• Raw Materials
  
• Work in progress
  
• Finished Goods

Whole sale & Retail
Goods for sale

Service Business
Consumables – used in the organisation
Items for sale – as part of service rendered

Inventory Valuation Methods

FIFO ( First in First out)
Under FIFO, the goods you receive first are the goods you sell first.
Under this method, closing inventory is valued at the most recent (New) price.

LIFO ( Last in First out)
Under LIFO, the goods you receive last are the goods you sell first.
Under this method, closing inventory is valued at the previous (old) prices.

AVCO (Average Cost)
Goods sold are valued at average cost.

FIFO: First-In-First-Out

Advantages

• Reflects the physical movement of materials within the business
  
• Easy to understand
  
• No profits or losses arise.

Disadvantages

• In times of inflations, products may cost less whilst replacement cost is high.
  
• Prices of materials may change during the processing of a particular requisition.

LIFO: Last-In-First-Out

Advantages

• Easy to calculate
  
• Cost of goods sold reflects current prices

Disadvantages

• Does not reflect the physical movement of materials in an organisation
  
• Not allowed under IAS 2

AVERAGE COST (AVCO)

Simple Average Method
Under this method, the assumption is that materials issued out of stock at anytime are simply drawn from a mixed group in the store without an attempt deliberately being made to identify materials or stock from an earlier or later purchase.

Manufacturing Accounts

DIRECT MATERIALS

• Opening Inventory of Raw Materials
  
• Purchases of Raw Materials
  
• Closing Inventory of Raw Materials
  
• DIRECT MATERIALS

DIRECT LABOUR

• DIRECT LABOUR

PRIME COST

• PRIME COST

FACTORY OVERHEADS (INDIRECT COSTS)

• Manufacturing Overheads

FACTORY COST

• FACTORY COSTS

COST OF FINISHED GOODS

• Opening Inventory of Work in Progress
  
• Closing Inventory of Work in Progress
  
• FACTORY COST OF GOODS MANUFACTURED

COST OF GOODS SOLD

• Opening Inventory of Finished Goods
  
• Closing Inventory of Finished Goods
  
• COST OF GOODS SOLD