1. Material Costing, Specific Identification Method, Weighted Average Cost Method, First In, First Out Method(FIFO), Last In, Fist Out Method(LIFO)

In this post, I am going to guide you about material costing, specific identification method, weighted average cost method, First In, First Out Method (FIFO), Last In, First Out Method (LIFO). For Material Costing Lesson 2, click here

Material Costing

The material costing process is used by businesses in which they calculate the cost of materials used in the production process. It is related to the cost accounting. With the help of material costing, businesses make prompt decisions regarding inventory, pricing, and cost control. The cost of goods manufactured consists of three elements; direct material, direct labor, and factory overhead or manufacturing overhead. In material costing, only the material part of manufacturing the product is considered. Different aspects of material cost are described below:

Direct materials:

Direct materials are the materials directly used in product manufacturing and materials that can be identified by the unit of product. Examples of direct material are raw material, custom duty, freight, carriage etc.

Indirect Materials:

Indirect materials are materials that take a part indirectly in the manufacturing of the product and cannot be traced by the unit of the product. For example lubricants, small tools, janitorial costs, etc.

Methods of Material Costing:

There are four different methods to calculate material cost:

1. Specific Identification Method
2. Weighted Average Cost Method
3. First In, First Out Method (FIFO)
4. Last In, Last Out Method (LIFO)

Specific Identification Method:

Under this method, the specific actual cost of units of material used in the manufacturing process is taken while calculating the cost of the ready product.

Weighted Average Cost Method:

Under this method, an average of the price of raw material used in the production process is considered while calculating the cost of the material.

First In, First Out Method (FIFO):

In FIFO method, the material that arrived earlier is considered first while issuing the material for the product manufacturing, and the cost of earlier material is considered while calculating the cost of product.

Last In, First Out Method (LIFO):

In LIFO method, the material that arrived most recently is considered first while issuing the material for the product manufacturing, and the cost of recent material is considered while calculating the cost of product.

Example for Understanding

100 units of material “A” costing $ 8 per unit were in stores on January 1, 20XX. Following are the receipts and issues during January.

Required: Prepare Material Ledger Card based on the above information using each of the following methods:

• FIFO
• LIFO
• Average cost method AVCO

Solution: i. (FIFO) Method

(ii) LIFO

iii. (AVCO) Method