Stores Accounting and Verification System

Stores Accounting and Verification System


For the purpose of costing the receipts of materials, the factor that should be included are material price freight charges, insurance, duties taxes and packing charge etc. The price quoted and accepted in purchase order may often be stated in various ways such as net prices, prices with discount term, free on board cost, insurance, freight etc. All these factors should be appropriately accounted for while costing for the incoming materials.


Another accounting is to be done for the issue to production and of the stocks held at the end of accounting period. Let discuss some of the important and frequently used system for the purpose:


FIFO: This system knows as First in and First Out system is based on assumption that the oldest stock is depleted first. Therefore, at the time of issue the rate pertaining to that will be applied. There is no ‘profit’ or ‘losses in the pricing arrangements. The value of the stocks held on and is the money that has been paid for that amount of stock at latest price levels. In case too many changes in price levels the FIFO system becomes unwieldy. Another limitation of this system is that it fails to provide a satisfactory answer to costing returns from stores.



LIFO: This system known as ‘Last in First Out’ system is based on the assumption that the most recent receipts are issued first. As the latest prices are charged in this system, it leads to lower reported profits in the periods of rising prices and this offers saving in taxes. In case of wide fluctuations in prices this system tends to immunize unrealized gains or losses in inventory. It has almost the same limitations as that of FIFO system.



Average cost system: This is based on assumption that issues to production department are equally made from different shipments in stock i.e. an average cost of shipment in stores is charged. It stabilizes the cost figures. The average is to be calculated by dividing the total cost with the number of items and is to be updated with every purchase.



Market Value System: This is also known as replacement rate costing, in which the materials issued are charged at the prevailing market rates. This system underestimates the stock on hand in the case of price increase, whereas it overestimates the stock on hand in the case of price decrease. This may in turn lead to writing off huge amount to make it realistic. Moreover a continuous monitoring of the market rates for all materials makes the system cumbersome.


Audit, Report, Verification, Magnifier, Auditor


Standard cost system: In this system a detailed analysis of market price and trends is carried out to determine a standard rate for a fixed period, say six months or so. This standard rate is charged to materials issued during this period irrespective of the actual rate. After the period is over the standard rate is reviewed and updated.



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