DETERMINING THE COST OF ELEMENTS
A crucial area of components accounting is a costing of materials requisitioned from the store for manufacturer use. The unit cost of newly arriving materials is well known at the time of order. The time of each purchase is also noted, but the supplies on hand typically include things purchased upon different schedules and at several prices. Items which look alike usually are commingled in the storeroom. As a result, it could be difficult or perhaps impossible to spot an issue of materials having a specific buy when identifying what product cost must be assigned to the materials being issued. Many practical techniques of solving this issue are available. In selecting the process to be employed, the accounting policies of the firm and the government and condition income tax rules must be regarded.
вЂўFirst-In, First-Out Method. The first-in, first-out (FIFO) technique of costing gets the advantage of convenience. The FIFO method assumes that components issued will be taken from the oldest elements in inventory. Therefore , the materials will be costed on the prices purchased the oldest materials. In many companies, the flow of costs employing FIFO tightly parallels the physical stream of supplies. For example , in the event that materials have a tendency to deteriorate in storage, the oldest supplies would be given first.
вЂўLast-In, First-Out Technique. The last-in, first-out (LIFO) method of charging materials, as the name implies, assumes that materials issued intended for manufacturing will be the most recently bought materials. As a result, materials granted are costed at the most the latest purchase prices, and inventories on hand at the end of the period are costed at prices paid for the earliest purchases. The LIFO approach to costing tightly approximates the physical movement of components in some companies. For example , in the smelting of iron ore, the uncooked material is stored in tremendous mountain piles. While ore is necessary for production, it is drawn from the heap in such a way that the material being...