Lifo fifo average cost. Write-off of materials for production
Its application implies that inventories are written off to cost of goods sold in the reverse order to which they were put on the balance sheet. In other words, the newest inventory is charged to cost of sales first, and the oldest inventory is recorded in the balance at the end of the reporting period at cost. The LIFO method can be applied both in the system of periodic and continuous inventory accounting, which is better illustrated by an example.
Example
A company working in the field retail construction materials, during the 4th quarter carried out the following purchase and sale operations facing brick.
* when buying facing bricks, its cost is indicated, and when selling, the selling price
The remainder of the facing bricks as of October 1 was 20,000 pieces at a cost price of $ 3.05. a piece.
Periodic inventory accounting system using the LIFO method
When calculating the cost of goods sold in the 4th quarter, it is necessary to write off inventories in the reverse order to which they were put on the balance sheet. The last shipment lot for December 6th will be written off first, then the deliveries received on November 13th and October 5th in succession, and last of all, the stocks from the balances at the beginning of the 4th quarter. The volume of products sold in reporting period amounted to 247,000 pieces of facing bricks, and purchased, including the remains, 255,000 pieces. Thus, the remainder of the bricks at the end of the 4th quarter will be 27,000 units. (380000-253000).
40000 + 38000 + 45000 + 125000 + 55000 + 50,000 = 353000 pcs.
20,000 + 120,000 + 140,000 + 100,000 = 380,000 pcs.
In accordance with the LIFO method, the delivery lots for December 6 and November 13 will be completely written off to the cost of goods sold in the amount of 240,000 pieces (100,000 + 120,000), and 113,000 pieces (353,000-240000) will be written off from the delivery lot for October 5. Consequently, the cost of goods sold in the 4th quarter will amount to $ 1,220,250.
100,000 * 3.70 + 140,000 * 3.45 + 113,000 * 3.25 = $ 1,220,250
20,000 * 3.05 + 7000 * 3.25 = 83750 c.u.
System of continuous inventory accounting according to the LIFO method
The continuous accounting system assumes the recalculation of the cost of the remaining inventory and the cost of goods sold after each transaction.
5 october ... Stock remains of facing bricks will amount to 140,000 units. (20,000 + 120,000) at a cost price of 607,000 USD
20,000 * 4.25 + 120,000 * 4.35 = 607,000 c.u.
17 October ... The cost of goods sold will be calculated at the cost of facing bricks from the latest delivery lot (for October 5) 3.25 USD. per piece and will amount to 130,000 USD.
40,000 * 3.25 = 130,000 c.u.
Warehouse balances will amount to 100,000 pieces (140,000-40,000) at a cost price of $ 321,000.
(120,000-40,000) * 3.25 + 20,000 * 3.05 = 321,000 c.u.
the 25th of October ... The cost of goods sold will also be determined by the last delivery lot and will amount to $ 123,500.
38000 * 3.25 = 123,500 c.u.
The remainder of the stock in the warehouse will be 62,000 units. (100,000-38,000) at a cost price of 197,500 c.u.
(120000-40000-38000) * 3.25 + 20000 * 3.05 = 197500 c.u.
November 4th ... The cost of sold products will be fully written off the remainder of the delivery batch for October 5 in the amount of 42,000 pieces (120,000-40,000-38,000) and 3,000 pieces from the balance at the beginning of the quarter, which will amount to 145,650 USD.
42000 * 3.25 + 3000 * 3.05 = 145650 c.u.
The remainder of the inventory, in turn, will amount to 17,000 pieces (62,000-45,000) at a cost price of $ 51,850.
17000 * 3.05 = 51850 c.u.
the 13th of November ... The remainder of the facing bricks in the warehouse will be 157,000 units. (17000 + 140,000), and its cost price is 534850 USD.
140,000 * 3.45 + 17,000 * 3.05 = 534850 c.u.
November 25 ... The cost of goods sold will be calculated at the price of the last, at this time, delivery lot and will amount to 431,250 USD.
125000 * 3.45 = 431250 c.u.
The remainder of the stock in the warehouse will be 32,000 units. (157000-125000) at a cost price of 103,600 USD.
(140,000-125000) * 3.45 + 17000 * 3.05 = 103600 c.u.
December 6 ... The remainder of the facing bricks in the warehouse will be 132,000 units. (100,000 + 32,000) at a cost price of 473,600 USD.
100000 * 3.70 + 15000 * 3.45 + 17000 * 3.05 = 473600 c.u.
December 17 ... The cost of goods sold is calculated on the basis of the cost of one facing brick from the delivery batch for December 6 and will amount to 203,500 USD.
55000 * 3.70 = 203500 c.u.
The remainder of the stock in the warehouse will be 77,000 units. (132000-55000) at a cost price of 270100 USD
45000 * 3.70 + 15000 * 3.45 + 17000 * 3.05 = 270100 c.u.
December 28th ... The balance of the delivery lot for December 6 and 5000 units will be fully charged to the cost of goods sold. from the delivery lot for November 13, which will amount to 183750 USD.
45000 * 3.70 + 5000 * 3.45 = 183750 c.u.
The warehouse balance will be 27,000 units. (77000-50000) at a cost price of 86,350 USD
10000 * 3.45 + 17000 * 3.05 = 86350 c.u.
The use of the LIFO method in the continuous accounting system showed that the cost of goods sold in the 4th quarter amounted to $ 1,217,650. (130,000 + 123500 + 145650 + 431250 + 203500 + 183750), and the cost of the remaining inventory is 86350 c.u.
So, we can conclude that the results of applying the LIFO method in the system of periodic and continuous inventory accounting may differ.
Over the thousand-year history of trade, many methods of accounting for goods have been developed and tested. One of them is the "lifo" method. The scope of its application is not limited only to accounting, this concept is widely used in warehouse logistics and sea freight.
The essence of the "lifo" method in different areas of activity
The whole essence of the method is reflected in its name: LIFO is an abbreviation of the English phrase "last in, first out", i.e. "The last one came - the first one left."
Let's imagine a warehouse to which homogeneous goods arrive in a continuous flow and in parallel from the warehouse there is a shipment. The cost of each batch of goods received is different, as is the number of units in the batch. And during shipment, an additional condition arises: a previously received batch may not be shipped completely, or goods from different batches, respectively, with different costs, fall into one shipment. How, in this case, to determine the cost of a shipped batch? After all, manually marking and counting how many units from which batch and at what purchase price got into the shipment is too laborious and impractical. If we apply the “lifo” method in this situation, then there is no need for such detailing. From whatever batch the shipped goods are in reality, it will be considered during accounting that the goods from the most recent batch are released first.
In warehouse logistics, the lifo method also presupposes the priority shipment of the last arriving goods. In the field of sea cargo transportation, this method implies that the cost of transportation includes loading, freight of the vessel, but does not include the cost of unloading at the port of arrival.
V banking according to this method, interest is accrued on the deposit, when the client withdraws a part of the deposit.
When assessing the cost of realizable valuable papers according to the lifo method, the selling price is considered to be equivalent to the value of the most recently acquired assets.
Example of costing according to the "lifo" method
Let's consider this method using the example of a warehouse: The warehouse has a carry-over of 8 items. in the amount of 700 rubles. Unit price, respectively, 700/8 = 87.5 rubles / piece. Several consignments of goods were capitalized per month on different dates.
- lot No. 1 20 pcs. at the price of 90 rubles / piece.
- lot No. 2 15 pcs. at the price of 92 rubles / piece.
- lot No. 3 35 pcs. at the price of 87 rubles / piece.
Total arrived at the warehouse: 20 + 15 + 35 = 70 pcs. Released at the end of the month 73 pcs. in one batch. The cost of goods sold using the lifo method will be calculated as follows:
- batch No. 3 will be completely withdrawn, the last one received - 35 pcs.
- batch number 2, which arrived earlier - 15 pieces, will be completely gone.
- batch No. 1, which arrived first, will be completely gone - 20 pcs.
And only then the missing quantity will be taken from the carry-over - 3 pcs.
The cost of the shipped batch will be:
(35 * 87) + (15 * 92) + (20 * 90) + (3 * 87.5) = 3,045 + 1,380 + 1,800 + 262.5 = 6,487.5 rubles. for 73 pcs.
The unit price will be: 6 487.5 / 73 = 88.9 rubles / piece. Unit cost warehouse balance remained unchanged - US $ 1.30 / piece.
The advantage of the "lifo" method is the ability to make a profit in the context of inflation and reduce taxable base for income tax. For this reason, the application of this method in accounting and tax accounting is currently prohibited.
When compiling accounting records, the a certain sequence of release of products from the warehouse... In order to preserve the order of goods issue, use different ways... The most famous of them are LIFO and FIFO, which are widely used in accounting.
Each method has distinctive features... For example, the FIFO technique is deciphered as follows "First in, first out", and it can be literally translated as "First came, first left"... That is, the first to be produced will be the products that arrived before everyone else.
LIFO works in the opposite way. Initially, the products sold are those that went on sale last. It stands for as follows "Last in, first out", can be literally translated as "Last came - first left"... Both methods are used in accounting and warehouse logistics.
In accounting
Goods will not be released if no expiration date... This explains the fact that the choice of one of the methods is of an abstract nature, the significance of which is only within the framework of accounting. Otherwise, it can be formulated so that, given the priorities, the accountant or manager will be able to more accurately determine which product was released.
Most often, it is customary to use the FIFO dispensing method, which allows you to track the progress of products. It is customary to use LIFO when there are certain circumstances.
Sometimes FIFO has formal character, this means that the release of the goods occurs only on the basis of some specific motives of the warehouse employee or seller. The product has the same cost as when purchasing a batch.
With the help of FIFO, you can estimate the cost of real costs, as well as track their return. The disadvantages of this method include the fact that inflation and price fluctuations are not taken into account. As a result, the profit may be incorrectly calculated.
If FIFO is used, then follow a set of rules:
- The cost of the first batch of products includes not only profit and costs, but also the remainder that is stored in the warehouse.
- The use of a regular FIFO and a modified one is not excluded.
- Accounting for the remainder of products is carried out no more than once a month.
Most often, the standard FIFO is used, with which it is much easier to perform calculations.
In logistics
In logistics you can use both methods but which one is more effective and best? An important criterion when choosing a method for writing off products will be the products driving along the supply chain, and more specifically, its features.
The FIFO method is reasonable for already obsolete product, which must be implemented for limited time... Quite often, you can see that FIFO is used in warehouses where raw materials are stored, while LIFO is used in warehouses where there are already products ready for sale.
The most important thing is that there is enough territory in which the warehouse is located, as well as there is specialized equipment that helps to optimize the work process.
Since 2008, the LIFO method has become prohibited to use... This can be explained the following reasons:
- Due to the need to bring the state accounting system to international.
- Due to the high inflation rate, it is not profitable to use among entrepreneurs. It is relevant only when the value falls.
At the moment this the method is still valid within tax reporting ... Its use is possible in the case of write-off of raw materials and product leftovers in the warehouse. Still, it would be more reasonable to use the FIFO method, which is much simpler, because the goods are received and written off in accordance with the sequence.
The FIFO method for inventory accounting is quite simple, because products arrive at the warehouse and are written off in accordance with the chronology of events. Objects for accounting can be various products: Construction Materials, raw materials or semi-finished products and finished products.
Given the fact that stocks in the warehouse have a significant part of working capital, then in this case it is important to optimize the process... Practice has shown more than once that it is best for organizations that manufacture products with shelf life restrictions to use the FIFO method.
Advantages and disadvantages
Each way to write off products has its own advantages and disadvantages. There will be benefits when using LIFO only in case of price increase due to the fact that the cost of products sold will increase.
In the case when the organization has a constant stock of products in the warehouse, then there will be benefits from using this method. LIFO is not beneficial in the case of accounting. Especially for those organizations that count on attracting investment.
As a result of inflation the financial profit of the enterprise will significantly decrease... But in the event of a fall in value, LIFO will allow you to demonstrate good profit in the reports. Although sometimes the data on the cost price in the reports does not coincide with reality. For this reason, it was forbidden to use this method outside of tax accounting.
As for the FIFO method, its main advantages can be called high speed of settlements and easy use... A huge advantage of the FIFO method is the opportunity to improve the creditworthiness of the enterprise.
Also, there are opportunities to attract a larger number of investors, that is, in the event of an increase in creditworthiness, an enterprise automatically has a chance to attract investors. With the FIFO method, real costs can be estimated more efficiently. The disadvantage of the method is that it is difficult to account for the degree of inflation or price fluctuations if used unevenly.
Consequences of canceling LIFO
Starting from January 1, 2008, it was decided to prohibit the use of LIFO in accounting as a method for estimating product inventories, which means that many enterprises had to look for other methods.
The decision of the Ministry of Finance of the Russian Federation became somewhat unexpected and, possibly, entailed a number of consequences. Why was the use of the LIFO method canceled after all? This decision was another step towards the standards financial statements International significance.
LIFO method was removed from the list international standards to improve the quality of the generated reports, as well as increase their reliability. The principle of the LIFO method is to write off the last purchased items first. In the event of inflation, this does not have a very good effect on the activities of many organizations.
All existing methods were approved by order of the Ministry of Finance. They include writing off goods based on several criteria. These include the following:
- At the cost of one unit of goods.
- At the average cost.
- According to the FIFO method.
In each case, there are certain peculiarities.
At the cost of one unit... The purpose of this method is to estimate certain stocks or those stocks that cannot replace each other. It is extremely rare to notice the use of this method in practice and only in exceptional situations. The method is more often used at the average cost.
Average cost... This method is more common than the previous one. It can be used to display average cost decommissioned products. Calculations are easy, using a fairly simple formula. For calculations, parameters such as the average cost of goods, the balance at the beginning of the month, the cost of inventories that were capitalized for the month, as well as the amount of inventory remaining at the beginning of the month and capitalized are used.
FIFO technique... It allows you to display the real situation in accounting. New products will not be discarded until the previous batch is consumed. There will be no inconsistencies in tax accounting, therefore this method is much more effective. and for the same reason it is used more often than previous techniques.
With the abolition of the use of LIFO, other methods began to be used that were previously little known. Despite the ban on LIFO, in tax accounting everything remained unchanged. When an organization does not follow the accounting regulations, then it is necessary to choose equally similar methods for assessment. In the event of an increase in the cost of products sold, the rejection of LIFO may inevitably lead to an increase in income taxes, which is the main consequence of the cancellation.
Recall that accounting at enterprises of various forms of ownership must be kept qualified specialists... Only in this case, you can avoid serious problems when submitting reports to the tax authorities.
LIFO method (LIFO) - a method of accounting for inventory in value terms at the price of the last manufactured or received batch. In accordance with this method, the last registered inventory items are removed from the accounting records first.
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The use of this method eliminates the underestimation of the estimated cost of production due to inflation. In conditions of rising prices when using the LIFO method, the reporting reflects the lowest possible profit indicators due to the write-off of the cost of inventories in a decrease in profit. Accordingly, the LIFO method makes it possible to solve the problem of demonstrating the minimum amount of profit in the reporting at the maximum amount of expenses.
Understanding the LIFO method
When using the LIFO method, the current costs of goods and materials are included in the profit and loss statement, so the profit is shown less and closer to real figures. In the balance sheet, the cost of inventories gradually decreases, since it records the balances acquired at the lowest actual cost.
It should be noted that since 2008 the LIFO method has been prohibited in accounting, but it can still be used for tax accounting purposes. LIFO tax accounting is a method of accounting for inventories at the cost of goods that are the latest in time of purchase. In tax accounting, this method is used when writing off raw materials for production, when selling purchased goods, or other disposal of securities.
LIFO accounting
The LIFO method is based on the assumption that inventory items that are the first to enter production (sale) should be valued at the cost of the latter in the order of production or purchase.
In this case, inventories in stock at the end of the period are estimated at the actual cost of the first purchases, and the cost of goods sold takes into account the cost of material resources that are the latest in time of acquisition.
In conditions of inflation, the use of the LIFO method allows organizations to be the first to write off the most expensive goods (materials, raw materials), which makes it possible to minimize payments for income tax for the current period.
Varieties of the LIFO method
As well as classical method LIFO in accounting policy can be used such its varieties as the method of standard stocks and the LIFO method for retail. The method of the normative volume of reserves is used only to account for the normative minimum of stocks of raw materials (grain, metals, etc.), and the rest of the stocks are accounted for using other methods.
The basis for the method is the statement that the organization should always have a certain stable volume of raw materials. If this volume falls below a certain level, then part of the profit should be directed to restoring inventories.
Unlike traditional LIFO estimates, normative estimates do not include layer shuffle gains. In the long term, the normative method, compared to the LIFO method, provides more conservative and continuous evaluations arrived.
The LIFO method for retail is based on a special technique based on the retail price index.
At first, the inventory of each department of the store is estimated using the retail method, after which the costs decrease in inverse proportion to the increase in the price of the goods according to the price index. In this case, a departure from the usual rule that when using the LIFO method, the calculation of indices must be carried out by the organization itself using internal data.
Advantages and disadvantages
The use of the LIFO method is beneficial in conditions of rising prices due to the possibility of increasing the value of the sold property, which leads to a decrease in the tax base for income tax.
If the organization has a relatively constant stock of goods in the warehouse, the use of this method will give it certain advantages. In addition, since stock balances are included in tax base on the property tax of organizations, the use of the LIFO method allows using purchased goods at lower prices when calculating this tax.
However, in accounting, the LIFO method is not particularly beneficial for organizations looking to attract investment. The fact is that the use of this method in conditions of inflation entails a decrease in financial result companies, which reduces the attractiveness of the organization from the point of view of potential investors.
On the contrary, when prices fall, the LIFO method makes it possible to demonstrate higher profit indicators in the reporting.
However, the use of the LIFO method becomes the reason that the cost data shown by the company in the reporting does not coincide in many respects with the real picture. That is why today the use of this method is limited to the framework of only tax accounting.
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MPZ may also differ. This leads to the fact that the actual cost of different lots of the same materials may be different. Often, when writing off materials for production, it is impossible to determine exactly from which batch these materials are, especially with a large range of materials. Therefore, the organization must select and consolidate in the accounting policy the method of writing off inventories in production.
Clause 16 of PBU 5/01 and clause 73 of the Methodological Guidelines for accounting Inventories, the following methods of assessing inventories have been established when they are released into production and otherwise disposed of:
· At the cost of each unit;
· At the average cost;
· According to the FIFO method (at the cost of the first materials to be purchased);
· By the LIFO method (at the cost of the latest materials purchased in time).
Considering the legally established methods of assessing the materials written off, it should be borne in mind that, in accordance with paragraph 78 of the Methodological Guidelines for accounting inventories, the use of methods of average estimates of the actual cost of materials (at the average cost, according to the FIFO and LIFO method) released into production or written off for other purposes, can be carried out by the following options:
Based on the average monthly actual cost (weighted estimate), the calculation of which includes the quantity and cost of materials at the beginning of the month and all receipts for the month ();
By determining the actual cost of the material at the time of its issue (rolling valuation), while the calculation of the average valuation includes the quantity and cost of materials at the beginning of the month and all receipts before the issue.
The use of rolling estimation should be economically justified and provided with appropriate computer technology.
The option of calculating average estimates of the actual cost of materials should be disclosed in the accounting policy of the organization.
Along with the weighted average cost estimate method, which calculates the average cost of all materials of a given type received in a given month, taking into account the opening balance, a moving average cost estimate can be applied, when the average cost is recalculated for each issue moment. In this case, the calculation should include the incoming balance, and only those parties that arrived before the corresponding issue of materials. If, when using the FIFO method, the cost of materials issued was calculated only at the end of the month, then when using the FIFO method on a rolling basis, the cost of materials issued can be calculated without waiting for the end of the month. After all, this method assumes that the materials are released from the earliest batches that have already arrived at the time of the release of materials.
Similar to the FIFO method for the standard and modified variants, the use of the LIFO method in rolling valuation allows you to determine the cost of goods issued without waiting for the end of the month.
The application of one of these methods for a group (type) of inventories is made on the basis of the assumption of the sequence of application of accounting policies.
According to clause 6 of the Accounting Regulations "Accounting policy of the organization" PBU 1/98, approved by Order of the Ministry of Finance of the Russian Federation of December 9, 1998 No. 60n, the assumption of the sequence of application accounting policies means that the entity adopted is applied consistently from one reporting year to the next.
It should be noted that for accounting purposes, an organization can use different write-off methods for different groups of inventories.
Clause 21 of PBU 5/01 establishes that for each group (type) of inventories during the reporting year, one assessment method is applied.
Let's take a closer look at each of these methods.
4.1. Write-off of materials at the cost of each unit
The method of writing off materials at the cost of each unit is convenient for use in cases where the organization uses in production small nomenclature materials and you can easily track which batch the materials were written off from, and their prices remain fairly stable for a long period. In this case, accounting is kept for each batch of materials separately, and materials are written off exactly at the prices at which they are accepted for accounting.
In addition, this method should be applied to assess the following types of MPZ:
Materials that are used in a special order - precious metals, precious stones, radioactive substances and other similar materials;
· Inventory that cannot be substituted for each other in the usual way.
Clause 74 of the Methodological Guidelines for the Accounting of Inventories, approved by Order of the Ministry of Finance of the Russian Federation No. 119n dated December 28, 2001, proposed two options for writing off materials at the price of each unit:
1. The unit cost includes all costs associated with the acquisition of these inventories. This method is used when it is possible to accurately determine the amount of acquisition costs that relate to different materials.
2. A simplified method, according to which only the cost of inventories at contractual prices is included in the unit cost, and transportation and other costs associated with their acquisition are accounted for separately and written off in proportion to the cost of materials written off for production at contractual prices. This method is used when it is impossible to establish exactly what proportion of transportation and procurement costs relates to each specific batch of purchased materials.
Example.
At the beginning of the month, the organization had paint residues in the amount of 120 kilograms in the amount of 3600 rubles at the actual cost.
Two batches of paint were purchased within a month:
The first batch - 150 kilograms, the cost of the batch - 3,200 rubles
The second batch - 200 kilograms, the cost of the batch - 5 600 rubles
Transportation costs amounted to 1,000 rubles
Accounting for materials is carried out with the inclusion of transport and procurement costs in the actual cost. For simplicity of calculations, all amounts are shown without VAT.
The actual cost of the paint is:
Balance at the beginning of the month: 3 600/120 = 30-00 rubles
The first batch: (3,200 + 1,000) / 150 = 28-00 rubles per 1 kilogram
The second batch: (5,600 + 1,000) / 200 = 33-00 rubles per 1 kilogram
During the month spent:
100 kilograms of paint from the remainder at the beginning of the month
90 kilograms of paint from the first batch
120 kilograms of paint from the second batch
The cost of the used paint is:
100 x 30-00 + 90 x 28-00 + 120 x 33-00 = 9 480 rubles
The main advantage of the method of writing off inventories at the cost of each unit is that all materials are written off at their actual cost without any deviations. However, this method is applicable only in cases where the organization uses a relatively small range of materials, when it is possible to determine exactly which materials are discarded.
In those cases where it is impossible to accurately track the materials from which particular batch were released into production, it is advisable to use one of the three methods described below.
Write-off of materials at average cost
In accordance with paragraph 18 of PBU 5/01, the method of writing off inventories at the average cost is as follows. For each type of material, the average unit cost is determined as the quotient of the total cost of these materials (the sum of the cost of materials at the beginning of the month and received during the month) by the amount of these materials (the sum of the balance at the beginning of the month and received during the month).
The cost of materials written off for production is determined by multiplying their quantity by the average cost. Remaining value for the end of the month is determined by multiplying the amount of material on the balance by the average cost. Thus, the average cost per unit of materials can vary from month to month. The balance on the inventory accounts of inventories is reflected at the average cost.
Example.
At the beginning of the month, the rest of the fabric in the organization is 1,500 m, the average cost is 95 rubles per 1 m. Within a month, the fabric was received:
1st batch: 1,000 m at a price of 89-50 rubles per 1 m;
2nd batch: 500m at the price of 100 rubles per 1m;
3rd batch: 1,200m at a price of 80 rubles per 1m.
Within a month, it was spent on the production of 3,500m of fabric.
The average cost of fabric is:
(1500 x 95 + 1000 x 89-50 + 500 x 100 + 1200 x 80) / (1500 + 1000 + 500 + 1200) = 90 rubles per 1m.
The cost of the fabric written off for production is: 3,500 x 90-00 = 315,000 rubles.
Remaining fabric at the end of the month: (1,500 + 1,000 + 500 + 1,200) - 3,500 = 700 m.
The cost of the rest of the fabric at the end of the month: 700 x 90-00 = 63,000 rubles
Write-off of materials according to the FIFO method
The FIFO method (from the English First In First Out) is also called the conveyor model.
In accordance with paragraph 19 of PBU 5/01, this method is based on the assumption that materials are written off for production in the sequence in which they were acquired. Materials from subsequent batches are not written off until the previous one is completely consumed. With this method, materials released into production are valued at the actual cost of materials, the first by the time of purchase, and the balance of materials at the end of the month is estimated at the cost of the latest by the time of acquisition.
In the event that the first purchases of a batch are cheaper, and the subsequent ones are more expensive, the use of the FIFO method leads to following result- materials are written off to production at a lower cost, respectively, the cost of production is lower and the profit is higher.
If prices for materials tend to decrease, then, on the contrary, if the FIFO method is applied, the profit will decrease.
In the literature, two methods have been proposed for determining the cost of materials written off for production using the FIFO method.
1. First, materials are written off at the cost of the first purchased batch, if the amount of materials written off is more than this batch, the second is written off, and so on.
2. The balance of materials at the end of the month is determined at the price of the latest in time of purchase. The cost of materials written off for production is determined by subtracting the resulting value from the total cost of materials received during the month (taking into account the balance at the beginning of the month).
Example.
Received within a month:
The total cost of the received paint is:
Option 1
A total of 270 cans of paint were written off, and at first the balance at the beginning of the month is written off completely (100 cans), then the first batch (120 cans) is written off. Since the total amount is greater, the remaining amount is deducted from the second batch 270 - (100 + 120) = 50 cans
100 x 35-00 + 120 x 40-00 + 50 x 45-00 = 10 550-00 rubles
(3 500-00 + 13 400-00) - 10 550-00 = 6 350-00 rubles
With this option, it is necessary to accurately determine which materials from which batches make up the balance at the end of the month, since in next month they will be written off first.
The remainder is:
From the second batch: 80 - 50 = 30 cans in the amount of 30 x 45-00 = 1,350-00 rubles;
The third batch remains at the end of the month in full: 100 x 50-00 = 5,000-00 rubles
Option 2
The balance at the end of the month is 130 cans, and the third batch (100 cans) is fully registered on the balance, since this is not enough, 30 cans from the second batch are also included in the balance.
100 x 50-00 + 30 x 45-00 = 6 350-00 rubles
The cost of the written off paint is:
(3 500-00 + 13 400-00) – 6 350-00 = 10 550-00.
The average cost of one can of discarded paint is:
10 550-00 / 270 = 39-07 rubles
From the examples given, it can be seen that the cost of the written-off materials and the remainder are the same when using both options. In the second option, it is sufficient to accurately determine the materials from which batches make up the balance in the warehouse, and the cost of the written-off materials is determined by calculation without the obligatory assignment to a specific batch, while in the first option it is necessary to precisely determine from which batches the materials are written off and remain at the end months. This option becomes very time consuming if the purchases of materials are made quite often during the month.
Write-off of materials by the LIFO method
The LIFO method (from the English Last In First Out) is also called the barrel model.
According to paragraph 20 of PBU 5/01, this method is based on the assumption that materials are written off to production in the reverse order to the one in which they were acquired. Materials from previously purchased lots are not written off until the last one is consumed. With the LIFO method, materials released into production are valued at the actual cost of materials that are the latest in terms of purchase, and the balance of materials at the end of the month is evaluated at the cost of the first in terms of acquisition.
In the event that the first purchases of a batch are cheaper, and the subsequent ones are more expensive, the use of the LIFO method leads to the fact that materials are written off to production at a higher cost, respectively, the cost of production is higher and the profit is lower.
If prices for materials tend to decrease, then, on the contrary, if the LIFO method is applied, the amount of income tax will decrease.
In the literature, two methods have been proposed for determining the cost of materials written off for production using the LIFO method.
1. First, materials are written off at the cost of the last purchased batch, if the amount of materials written off is more than this batch, the previous one is written off, and so on.
2. The balance of materials at the end of the month is determined at the price of the first in the time of purchase. The cost of materials written off for production is determined by subtracting the resulting value from the total cost of materials received during the month (taking into account the balance at the beginning of the month).
Example.
Let's use the conditions of the previous example.
At the beginning of the month, the rest of the paint was 100 cans at a price of 35-00 rubles per can.
The balance at the beginning of the month is: 100 x 35-00 = 3,500 rubles
Received within a month:
1 batch: 120 cans at a price of 40-00 rubles per can;
2nd batch: 80 cans at a price of 45-00 rubles per can;
3rd party: 100 cans at a price of 50-00 rubles per can.
Total cost of received paint:
120 x 40-00 + 80 x 45-00 + 100 x 50-00 = 13 400-00 rubles
During the month, 270 cans of paint were written off into production, the remainder at the end of the month is 130 cans.
Option 1
A total of 270 cans of paint were written off, and first the third batch (100 cans) is completely written off, then the second batch (80 cans) is written off. Since the total quantity is greater, the remaining quantity is deducted from the first batch: 270 - (100 + 80) = 90 cans
The cost of the written off paint:
100 x 50-00 + 80 x 45-00 + 90 x 40-00 = 12 200-00 rubles
The average cost of one can of discarded paint is:
The cost of the rest of the paint is:
(3 500-00 + 13 400-00) - 12 200-00 = 4 700-00 rubles
With this option, it is necessary to accurately determine which materials from which batches make up the balance at the end of the month, since these data are needed to correctly assign materials to specific batches when writing off in subsequent months.
The remainder is:
From the first batch: 120 - 90 = 30 cans in the amount of 30 x 40-00 = 1,200-00 rubles;
The paint, which was the remainder at the beginning of the month, is fully credited to the remainder and at the end of the month: 100 x 35-00 = 3,500-00 rubles
Option 2
The balance at the end of the month is 130 cans, and the paint that was in the balance at the beginning of the month (100 cans) remains unused at the end of the month, since this is not enough, 30 cans from the first batch are also included in the balance.
The value of the balance at the end of the month is:
100 x 35-00 + 30 x 40-00 = 4 700-00 rubles
The cost of the written off paint is:
(3 500-00 + 13 400-00) - 4 700-00 = 12 200-00 rubles
Average cost of one can of discarded paint:
12 200-00 / 270 = 45-19 rubles
Thus, with the LIFO method, the cost of written off materials and the remainder are also the same when using both options. In the second option, it is sufficient to accurately determine the materials from which batches make up the balance in the warehouse, and the cost of the written-off materials is determined by calculation without the obligatory assignment to a specific batch, while in the first option it is necessary to precisely determine from which batches the materials are written off and remain at the end months. With frequent purchases of materials, the first option is inconvenient due to the complexity of the calculations.
Comparison of different methods of disposal of materials
When using the methods of writing off inventories - at average cost, FIFO or LIFO - the calculated values of the cost of materials written off and balances at the end of the period differ from each other. This, in turn, affects the cost of production, the amount of profit and the amount of property tax. Therefore, when choosing a method for disposing of materials, it is necessary to determine which criteria are most important.
Example.
At the beginning of the month, the balance of materials was 300 units at a price of 110-00 rubles per unit for total amount: 300 x 110-00 = 33 000-00 rubles
Received within a month:
1 batch: 500 units at a price of 130-00 rubles per unit for a total amount of 65,000-00 rubles;
2nd batch: 600 units at a price of 170-00 rubles per unit for a total amount of 102,000-00 rubles;
3rd batch: 200 units at a price of 180-00 rubles per unit for a total amount of 36,000-00 rubles
Total cost of materials:
33,000-00 + 65,000-00 + 102,000-00 + 36,000-00 = 236,000-00 rubles
A) Average cost method.
The average unit cost is: 236,000-00 / 1,600 = 147-50 rubles
The cost of written off materials is: 1 200 x 147-50 = 177 000-00 rubles
The balance at the end of the month is: 400 x 147-50 = 59,000-00 rubles
B) FIFO method
Balance at the end of the month: 200 x 180-00 + 200 x 170-00 = 70,000-00 rubles
The cost of written off materials: 236,000-00 - 70,000-00 = 166,000-00 rubles
Average unit cost of written off materials: 166,000-00 / 1,200 = 138-33 rubles
Average cost per unit of materials on the balance: 70,000-00 / 400 = 175-00 rubles
C) LIFO method
Balance at the end of the month: 300 x 110-00 + 100 x 130-00 = 46,000-00 rubles
The cost of written off materials: 236,000-00 - 46,000-00 = 190,000-00 rubles
Average unit cost of written off materials: 190,000-00 / 1,200 = 158-33 rubles
Average unit cost of materials on the balance: 46,000-00 / 400 = 115-00 rubles
Indicator | Average cost method | FIFO method | LIFO method |
177 000-00 | 166 000-00 | 190 000-00 | |
147-50 | 138-33 | 158-33 | |
Balance at the end of the month | 59 000-00 | 70 000-00 | 46 000-00 |
147-50 | 175-00 | 115-00 |
Thus, we see that under the condition of a constant increase in prices for materials when using the FIFO method, the cost of written off materials is the lowest, and the cost of materials on the balance is maximum. In this case, the cost of production is lower and, accordingly, the profit from the sale of products is higher.
When using the LIFO method, the cost of written-off materials is maximum, while the cost of production increases and, accordingly, the profit decreases.
When using the method of write-off at the average cost, the cost of written-off materials and, therefore, the cost of production are less determined by price fluctuations and can remain at a fairly stable level.
Hence, we can draw the following conclusion: the LIFO method is convenient for minimizing income tax. The FIFO method is most disadvantageous for these purposes, since in this case taxes increase. However, if the organization aims to maximize profits and, therefore, increase the amount of dividends paid, it is more convenient to apply the FIFO method. In addition, this method allows you to obtain more reliable data on the cost of materials written off and the cost of production, since in practice, materials are usually written off in the order of receipt.
These findings hold true if material prices rise. If prices for materials tend to decrease, then the FIFO method becomes more convenient to minimize taxes, and the LIFO method is least suitable for these purposes. The average cost method still gives the average.
To demonstrate the advantages and disadvantages of various methods for disposing of inventories, we considered options in which prices for materials are either constantly increasing or constantly decreasing. In practice, prices for materials can both increase and decrease. In this case, the differences between the methods are not so obvious.
Example.
Let's change the conditions of the previous example.
At the beginning of the month, the balance of materials was 300 units at a price of 110-00 rubles per unit for a total amount of 33,000-00 rubles
Received within a month:
1 batch: 500 units at a price of 170-00 rubles per unit for a total amount of 85,000-00 rubles;
2nd batch: 600 units at a price of 180-00 rubles per unit for a total amount of 108,000-00 rubles;
3rd batch: 200 units at a price of 130-00 rubles per unit for a total amount of 26,000-00 rubles
Total amount of materials (balance at the beginning of the month and received materials):
300 + 500 + 600 + 200 = 1,600 units.
Total cost of materials:
33,000-00 + 85,000-00 + 108,000-00 + 26,000-00 = 252,000-00 rubles
During the month, 1,200 units were consumed.
Remaining at the end of the month: 1,600 - 1,200 = 400 units.
A) Average cost method.
The average unit cost is: 252,000-00 / 1,600 = 157-50 rubles
The cost of written off materials is: 1 200 x 157-50 = 189 000-00 rubles
The balance at the end of the month is: 400 x 157-50 = 63,000-00 rubles
B) FIFO method
Balance at the end of the month: 200 x 130-00 + 200 x 180-00 = 62,000-00 rubles
The cost of written off materials: 252,000-00 - 62,000-00 = 190,000-00 rubles
Average unit cost of materials written off:
190 000-00 / 1 200 = 158-33 rubles
Average cost per unit of materials on the balance: 62,000-00 / 400 = 155-00 rubles
C) LIFO method
Balance at the end of the month: 300 x 110-00 + 100 x 170-00 = 50,000-00 rubles
The cost of written off materials: 252,000-00 - 50,000-00 = 202,000-00 rubles
Average unit cost of written off materials: 202,000-00 / 1,200 = 168-33 rubles
Average unit cost of materials on the balance: 50,000-00 / 400 = 125-00 rubles
Let's combine the obtained results into a table.
Indicator | Average cost method | FIFO method | LIFO method |
The cost of written off materials | 189 000-00 | 190 000-00 | 202 000-00 |
Average unit cost of materials written off | 157-50 | 158-33 | 168-33 |
Balance at the end of the month | 63 000-00 | 62 000-00 | 50 000-00 |
Average unit cost of materials on the balance | 157-50 | 155-00 | 125-00 |
As you can see, under the conditions this example all three methods give similar results, and when using the methods of average cost and FIFO, the obtained values are practically the same. Depending on the dynamics of prices, situations may arise when the methods of average cost and LIFO, or FIFO and LIFO, or all three methods will lead to the same results.
Learn more about accounting and tax accounting MPZ you can get acquainted in the book of JSC "BKR Intercom-Audit" "Materials, semi-finished products, overalls, special equipment"