Pricing of Material Issues (FIFO and Weighted Average)

When materials are bought at different times, they are often bought at different rates. Once these differently-priced lots are mixed in store, the question arises: when material is issued to production, at which rate should that issue be priced? The Odisha CHSE syllabus covers two widely-used methods — First-In-First-Out (FIFO) and Weighted Average — both consistent with the treatment of inventories under Accounting Standard AS-2 (Valuation of Inventories). Each is worked through a Stores Ledger Account, the proforma that records every receipt, issue and running balance of a material in both quantity and value.

1. First-In-First-Out (FIFO) Method Under FIFO it is assumed that the material received FIRST is issued FIRST. So issues are priced at the rate of the oldest lot still in stock, working through progressively newer lots as older ones are used up. The closing stock therefore consists of the most recently purchased lots, and is valued close to current/replacement cost. Advantages: it is simple and logical, following the natural physical flow of most materials; closing stock is valued near current cost; and it is fully acceptable under AS-2 for inventory valuation. Limitations: when prices are rising, FIFO charges production with older, cheaper rates, which can overstate profit; and two identical jobs done at different times may be charged at different rates, making cost comparison harder.
2. Weighted Average Method Under the Weighted Average method the issue rate is found by dividing the TOTAL VALUE of material in stock by the TOTAL QUANTITY in stock, so that larger lots correctly carry more weight. A fresh weighted-average rate is worked out each time a new lot is received, and it applies to every issue until the next receipt. Advantages: it gives due weight to the quantity of each lot, so the rate is genuinely representative; it smooths out erratic price fluctuations; and — because the rate is simply total value ÷ total quantity at every stage — the closing balance always ties out exactly with the actual cost of material available. …