At what cost is material issued from the warehouse written off: FIFO or weighted average?
The same sugar was bought at three different prices. Which price is used when it is issued to production? We compare the methods of NAS No. 4 using a confectionery workshop as an example.
The "Nurafshon Qandolat" workshop bought sugar for its pastries three times in one month, and each time the price was different. At the end of the month, 250 kg of sugar was issued to production. The accountant, Zarina, faced a question: at what price should these 250 kg be recorded?
This is not a trivial question. The chosen price changes the cost of the product, and therefore the profit as well.
What methods does NAS No. 4 provide?
Under paragraph 62 of the standard, the cost of inventories issued is determined using one of the following three methods: 1. Specific identification: each unit is written off at its own actual cost 2. Weighted average cost (AVECO): the average cost of all units is used 3. FIFO: the inventory that came in first is assumed to go out first
The first method is intended for inventories that are not interchangeable and are used in a separate order. Sugar, however, is uniform: you cannot tell which sack it came from. So Zarina chooses between FIFO and AVECO.
What happened in the warehouse during the month?
| Date | Transaction | Quantity, kg | Price, soum | Amount, soum |
|---|---|---|---|---|
| 1st | Opening balance | 100 | 9 000 | 900 000 |
| 8th | Purchase | 200 | 9 600 | 1 920 000 |
| 21st | Purchase | 100 | 10 200 | 1 020 000 |
| Total | 400 | 3 840 000 |
At the end of the month, 250 kg was issued to production.
How much is issued under FIFO?
Under FIFO, the oldest sugar "goes out" first: - 100 kg × 9 000 = 900 000 (opening balance) - 150 kg × 9 600 = 1 440 000 (from the batch of the 8th) - Issued to production: 2 340 000 soum
The 150 kg left in the warehouse: 50 kg × 9 600 + 100 kg × 10 200 = 1 500 000 soum.
And under weighted average cost?
First, the average price of one kilogram is found: 3 840 000 ÷ 400 = 9 600 soum. - Issued to production: 250 × 9 600 = 2 400 000 soum - The 150 kg left in the warehouse: 150 × 9 600 = 1 440 000 soum
How do the results differ?
| Indicator | FIFO | AVECO |
|---|---|---|
| Sugar issued to production | 2 340 000 | 2 400 000 |
| Closing balance at month end | 1 500 000 | 1 440 000 |
| Total (does not change) | 3 840 000 | 3 840 000 |
When prices are rising, FIFO shows a lower cost of issues and a higher closing balance. When prices are falling, the picture is reversed. The total is the same under both methods: only its split into the "issued" and "remaining" parts differs.
The journal entry is the same under both methods, only the amount differs: Debit 2010 "Primary production" – Credit 1010 "Raw materials and supplies".
How should the method be chosen?
- The chosen method is written down in the accounting policy
- For each group of inventories, only one method is applied throughout the reporting year
- The average price can be calculated once at month end or each time a new batch arrives: set this in the accounting policy too
Test yourself
5 questions on this topic: pick an option or reveal the answer.
The actual cost of the raw hides in the warehouse of "Kitob charm" LLC is 30,000,000 soums, and their net realisable value (market value) is 26,000,000 soums. Under paragraph 87 of NAS No. 21, at what value is the material carried?
The warehouse held 10 units at 1 000 soum each; then 10 units arrived at 1 200 soum each. 15 units were issued. What is the cost of the goods issued under FIFO?
A wholesale trading firm sold goods from its warehouse to a customer. With what journal entry is the cost of the goods sold written off?
"Qaqajon Pishiriq" LLC sold to a customer part of the finished pastries in its warehouse, with a cost of 12,000,000 soums. How is the write-off of the cost recorded?
"Dehqonobod sement" LLC leased its idle warehouse to another organisation under an operating lease. The warehouse's initial cost is 216,000,000 soums; the accounting policy sets the straight-line method and a useful life of 240 months, and there is no residual value. How is monthly depreciation recorded at the lessor?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 4 "Inventories", paragraphs 62–67 · specific identification, AVECO and FIFO methods; one method throughout the year; the method is stated in the accounting policy
- NAS No. 21 "Chart of Accounts" · accounts 1010, 2010
- Example and amounts · prepared by the author, hypothetical