The procedure for writing off materials at average cost. Cost of production Weighted average price using a moving estimate method
Clause 16 of PBU 5/01 and clause 73 Guidelines on accounting of inventories, approved by order The Ministry of Finance of the Russian Federation dated December 28, 2001 No. 119n, establishes the following methods for assessing inventories when released into production and other disposals:
· at the cost of each unit;
· at average cost;
· using the FIFO method (at the cost of the first materials purchased);
· using the LIFO method (at the cost of the most recent materials purchased).
It should be noted that for the purposes of accounting An organization may use different write-off methods for different groups of inventories.
Let's take a closer look at each of these methods.
Write-off of inventories 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 an organization uses a small range of materials in production and you can easily track which batch the materials were written off from, and their prices remain fairly stable over 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 were accepted for accounting. Paragraph 74 of the Guidelines for the accounting of inventories offers 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 amounts of acquisition costs that relate to different materials.
2. A simplified method in which only the cost of inventory is included in the unit cost negotiated prices, 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 contract prices. This method is used when it is impossible to accurately determine what share of transportation and procurement costs relates to each specific batch of purchased materials.
Example 1
1 option
At the beginning of the month, the Etalon organization had 120 kg of paint remaining in the amount of 3,600 rubles. at actual cost.
· first batch - 150 kg, cost of the batch - 3200 rubles, transportation costs amounted to 1000 rubles;
· second batch - 200 kg, cost of the batch - 5600 rubles, transportation costs amounted to 1000 rubles.
Accounting for materials is carried out with the inclusion of transportation and procurement costs in the actual cost. For ease of calculation, all amounts are given without VAT.
The actual cost of paint is:
balance at the beginning of the month: 3600 / 120 = 30 rubles;
first batch: (3200 + 1000) / 150 = 28 rubles. for 1 kg;
second batch: (5600 + 1000) / 200 = 33 rubles. for 1 kg.
Used during the month:
The cost of used paint is:
100 × 30 + 90 × 28 + 120 × 33 = 9480 rub.
Example 2
Option 2
Organization “A” uses a simplified method of writing off materials at the cost of each unit.
At the beginning of the month, organization “A” has 120 kg of paint worth 3,100 rubles. at negotiable prices. Transport costs - 500 rub.
Two batches of paint were purchased within a month:
1) 150 kg, batch cost - 3200 rubles. Transport costs - 1000 rubles;
2) 200 kg, batch cost - 5600 rubles. Transport costs - 1000 rubles.
The cost of paint at negotiated prices is:
balance at the beginning of the month: 3100 / 120 = 25.83 rubles;
first batch: 3200 / 150 = 21.33 rubles;
second batch: 5600 / 200 = 28 rubles.
Within a month the following were put into production:
· 100 kg of paint from the remainder at the beginning of the month;
· 90 kg of paint from the first batch;
· 120 kg of paint from the second batch.
The cost of paint supplied to production per month at negotiated prices is: 100 kg × 25.83 rubles. + 90 kg × 21.33 rub. + 120 kg × 28 rub. = 8132.70 rub.
Let's calculate the percentage of TZR:
(500 + 1000 + 1000) / (3100 + 3200 + 5600) × 100 = 21.01%.
The amount of technical and production work related to the increase in the cost of paint released into production:
8132.70 rub. × 21.01% = 1708.68 rub.
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, we repeat that this method is applicable only in cases where the organization uses a relatively small range of materials and when it is possible to accurately determine which materials are written off.
In cases where it is impossible to accurately track which 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 to production at average cost
The method of writing off inventories at average cost is as follows. For each type of materials, the average unit cost is determined as the quotient of dividing the total cost of these materials (the sum of the cost of materials at the beginning of the month and those received during the month) by the quantity of these materials (the sum of the balance at the beginning of the month and those received during the month).
The cost of materials written off for production is determined by multiplying their quantity by the average cost. The cost of the balance at the end of the month is determined by multiplying the amount of material on balance by the average cost. Thus, the average unit cost of materials may vary from month to month. The balance of inventory accounts is reflected at average cost.
Example 3
Let’s assume that at the beginning of the month the Etalon organization has 1,500 m of fabric remaining, and the average cost is 95 rubles. for 1 m. Within a month the fabric arrived:
1st batch: 1000 m at a price of 89.50 rubles. for 1 m;
2nd batch: 500 m at a price of 100 rubles. for 1 m;
3rd batch: 1200 m at a price of 80 rubles. for 1 m.
During the month, 3500 m of fabric were used to produce.
The average cost of fabric is:
(1500 × 95 + 1000 × 89.50 + 500 × 100 + 1200 × 80) / (1500 + 1000 + 500 + 1200) = 90 rub. for 1 m.
The cost of fabric written off for production is: 3500 × 90.00 = 315,000 rubles.
Remaining fabric at the end of the month: (1500 + 1000 + 500 + 1200) – 3500 = 700 m.
Cost of remaining fabric at the end of the month: 700 × 90.00 = 63,000 rubles.
Note!
In the letter of the Ministry of Finance of the Russian Federation dated March 10, 2004 No. 16-00-14/59 “On accounting of inventories” an explanation is given on the use of methods for average estimates of the actual cost of materials:
“In accordance with Order of the Ministry of Finance of Russia dated December 28, 2001 No. 119n “On approval of Guidelines for accounting of inventories”, paragraph 78, the use of methods for average estimates of the actual cost of materials released into production or written off for other purposes, provided for in subparagraphs “b”, “c”, “d” of paragraph 73 of these Guidelines, can be carried out in the following options:
· based on the average monthly actual cost (weighted estimate), which includes the quantity and cost of materials at the beginning of the month and all receipts for the month (reporting period);
· by determining the actual cost of the material at the time of its release (rolling estimate), while the calculation of the average estimate includes the quantity and cost of materials at the beginning of the month and all receipts up to the time of release.
The use of a rolling assessment must be economically justified and supported by appropriate computer technology.
Thus, there are no restrictions, except purely economic factor, arising from the “principle of rational accounting”, is not provided for in the application of these options for average estimates.”
The difference between weighted and rolling estimating is the choice of date on which the raw materials are valuated. When using a weighted assessment, it is made on reporting date, and when using a rolling estimate - at the time of writing off raw materials and materials for production. Let us explain this with an example.
Example 4
The figures are given without VAT.
At the beginning of the month, the accounts of the Etalon organization included 500 m of fabric leftovers for the production of garments in the amount of 25,000 rubles. The average cost of 1 m of fabric is 50 rubles.
Within a month, the warehouse of Etalon LLC received:
2nd: 100 m of fabric at a price of 45 rubles. in the amount of 4500 rubles;
10th: 200 m of fabric at a price of 52 rubles. in the amount of 10,400 rubles;
25th: 300 m of fabric for 47 rubles. in the amount of 14,100 rubles.
During the month, 700 m of fabric were released into production, including:
17th - 400 m;
27th - 300 m.
1. The Etalon organization applies a weighted assessment (the assessment is made as of the reporting date).
Let us determine the quantity and cost of fabric received during the month, taking into account the quantity and cost of fabric at the beginning of the month:
500 + 100 + 200 + 300 = 1100 m.
25,000 + 4500 + 10,400 + 14,100 = 54,000 rub.
The average price of 1 m of fabric per month will be:
54,000 rub. / 1100 m = 49.09 rub.
Cost of fabric written off during the month:
700 m × 49.09 rub. = 34,363 rub.
Remaining fabric at the end of the month: 1100 – 700 = 400 m.
Cost of remaining fabric at the end of the month: 54,000 – 34,363 = 19,637 rubles.
RUB 19,637 / 400 m = 49.09 rub.
2. The Etalon organization applies a rolling assessment (the assessment is made on the date the materials are written off for production).
The first batch of fabric was released into production on the 17th, therefore, when using this method, it is necessary to determine average cost fabrics for this date.
Let’s determine the quantity and cost of fabric received (taking into account the balance at the beginning of the month) on the 17th:
500 + 100 + 200 = 800 m.
25,000 + 4,500 + 10,400 = 39,900 rubles.
Average cost of 1 m of fabric: RUB 39,900. / 800 m = 49.88 rub.
On the 17th, 400 m of fabric was released into production, its cost will be:
400 m × 49.88 rub. = 19,952 rub.
Now you need to determine the quantity, cost and average cost of 1 m of fabric remaining in the warehouse on the 18th:
800 – 400 = 400 m.
39,900 – 19,952 = 19,948 rubles.
RUB 19,948 / 400 m = 49.87 rub.
The next batch of fabric was released into production on the 27th, but on the 25th another batch of fabric in the amount of 300 m was received at the warehouse in the amount of 14,100 rubles. Therefore, it is necessary to determine the average cost of 1 m of fabric as of the 27th.
Let's determine the quantity and cost of 1 memtra of fabric received from the 18th to the 27th (taking into account the balance on the 18th):
400 + 300 = 700 m.
19,948 + 14,100 = 34,048 rubles.
The average cost of 1 m of fabric at the time of release of the next batch will be:
RUB 34,048 / 700 m = 48.64 rub.
The cost of fabric released for production on the 27th will be:
300 m × 48.64 rub. = 14,592 rub.
Remaining fabric at the end of the month: 700 – 300 = 400 m.
Cost of fabric at the end of the month: 34,048 – 14,592 = 19,456 rubles.
Average cost of 1 m of fabric at the end of the month (at the beginning of the next month):
RUB 19,456 / 400 m = 48.64 rub.
End of the example.
Note that the choice of one or another assessment method is influenced by the document flow procedure established in the organization.
Write-off of materials to production using the FIFO method
This method is based on the assumption that materials are released into production during the reporting period in the sequence of their acquisition, that is, materials that are the first to be released into production should be valued at the cost of the first purchases. When applying this method, the assessment of materials in the warehouse of a production organization at the end of the reporting period is made at the cost of the latest purchases, and the cost of finished products takes into account the cost of earlier purchases.
If the first batches of materials purchased are cheaper, and the subsequent ones are more expensive, then the use of the FIFO method leads to an increase in balance sheet profit, since materials are written off to production at a lower cost, which reduces the cost of finished products, but the balance of materials in the warehouse is reflected at higher price.
If prices for materials tend to decrease, then the use of this method leads to an increase in production costs and, accordingly, to a decrease in balance sheet profit.
There are two ways to determine 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 quantity of materials written off is greater than this batch, the second batch is written off, etc. The balance of materials is determined by subtracting the cost of written-off materials from total cost materials received for the month (taking into account the balance at the beginning of the month).
2. The balance of materials at the end of the month is determined at the price of the most recent 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 5
In the example, the figures are given without VAT.
At the beginning of the month, Electron LLC listed the remains of black-and-white picture tubes in the amount of 28 pieces at a price of 892.86 rubles. per piece in the amount of 25,000 rubles. Within a month, Electron LLC received the following picture tubes:
1st batch: 10 pieces at a price of 930 rubles;
2nd batch: 20 pieces at a price of 900 rubles;
3rd batch: 15 pieces at a price of 830 rubles.
Within a month, 60 picture tubes were put into production.
For greater clarity, let's summarize all the data in a table.
Initial data
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Number of units |
Unit price, rub. |
Amount, rub. |
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Balance at the beginning of period |
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Received during the period, total |
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including: |
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1st batch |
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2nd batch |
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3rd party |
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Total including balance at the beginning of the period |
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Released into production |
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Balance at the end of the period |
When using this method, the actual cost of picture tubes released into production will be:
1 option
A total of 60 picture tubes were put into production, and first the balance of picture tubes at the beginning of the month (28 pieces) is completely written off, then the first received batch (10 pieces), the second (20 pieces) are written off, and the remaining quantity (2 pieces) is written off from the third batch. The cost of picture tubes released into production is:
28 pieces × 892.86 rub. + 10 pieces × 930 rub. + 20 pieces × 900 rub. + 2 pieces × 830 rub. = 53,960 rub.
The actual cost of one kinescope is: 53,960 rubles/60 pieces = 899.33 rubles.
The quantitative balance of picture tubes in the warehouse is: (28 + 45) – 60 = 13 pieces.
The cost of the remaining picture tubes in the warehouse: 13 pieces × 830 rubles. = 10,790 rub.
As you can see, with this option it is necessary to accurately determine which picture tubes from which batch make up the balance at the end of the month, since next month it is this (the third batch) that will be the first to be written off.
Option 2
The balance of picture tubes at the end of the month is 13 pieces worth 830 rubles, therefore, its cost is 10,790 rubles.
The cost of picture tubes released into production is: (25,000 + 39,750 – 10,790 = 53,960 rubles.
The actual cost of 1 kinescope released into production is: 53,960 rubles. / 60 pieces = 899.33 rub.
From the above examples it is clear that the cost of picture tubes released into production and their balance in the warehouse are the same when using both options. With the second option, it is enough to accurately determine which batch of picture tubes the balance in the warehouse consists of, and the cost of picture tubes released into production is determined by calculation without necessarily being allocated to a specific batch, whereas with the first option it is necessary to accurately determine from which batches the picture tubes are written off and remain at the end of the month. This option becomes very labor-intensive if the organization purchases materials and components quite often during the month.
Write-off of materials to production using the LIFO method
This method is based on the assumption that materials are written off into production in the reverse order of the order in which they were purchased. Materials from previously purchased batches are not written off until the last one is used up. With this method, materials released into production are valued at the actual cost of the materials that were most recently acquired, and the balance of materials at the end of the month is valued at the cost of the materials that were most recently acquired.
In the event that the first batches purchased in time are cheaper, and the subsequent ones are more expensive, the use of the LIFO method leads to an increase in the cost of production and a decrease in book profit. The balance of materials on account 10 “Materials” is reflected at lower prices.
If prices for materials tend to decline, then the situation is reversed.
There are two ways to determine 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 quantity of materials written off is greater than this batch, the previous batch is written off, etc. The balance of materials is determined by subtracting the cost of written-off materials from the total cost of materials received during the month (taking into account the balance at the beginning of the month).
2. The balance of materials at the end of the month is determined at the price of the first purchases. 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 6
Let's consider the write-off of materials into production using the LIFO method, using the conditions of the previous example (see table).
1 option
A total of 60 picture tubes were put into production, and first the third batch (15 pieces) is completely written off, then the second received batch (20 pieces), the first (10 pieces) are written off, and the remaining quantity (15 pieces) is written off from the balance at the beginning of the month. The cost of picture tubes released into production is:
15 pieces × 830 rub. + 20 pieces × 900 rub. + 10 pieces × 930 rub. + 15 pieces × 892.86 rub. = 53,142.90 rub.
The actual cost of one kinescope is: RUB 53,142.90. / 60 pieces = 885.72 rub.
Cost of the remaining picture tubes in the warehouse: 13 pieces × 892.86 rubles. = 11,607.18 rub.
Option 2
The balance of picture tubes at the end of the month is 13 pieces worth 892.86 rubles, therefore, its cost is 11,607.18 rubles.
The cost of picture tubes released into production is: (25,000 + 39,750) – 11,607.18 = 53,142.82 rubles.
The actual cost of 1 kinescope is: 53,142.82 rubles. / 60 pieces = 885.72 rub.
N.S. Kulaeva, consultant-methodologist at BKR-Intercom-Audit CJSC
In the 1C:ERP Enterprise Management configuration, the following methods for estimating the cost of goods are implemented:
1. Monthly average- performs calculations based on the average price for the reporting period without taking into account batches. The total cost value is used for both disposed goods and warehouse balances.
2. FIFO weighted average score- the cost of remaining goods at the end of the month is determined based on the last batches received. The total cost of disposed goods is determined using FIFO. The cost of retired (sold, written-off goods) for each expense document is the same and does not depend on the distribution of batches for each document.
3. FIFO rolling estimate– the cost price is calculated using FIFO as part of a full-fledged batch accounting.
The valuation method in the 1C:ERP Enterprise Management program is selected when creating an accounting policy:
Cost calculation in 1C:ERP Enterprise management can be done for one or several organizations.
If the enterprise uses the Intercompany scheme, then the cost must be calculated for all organizations included in the Intercompany structure, simultaneously using one calculation method.
IN application solution 1C:ERP Enterprise Management has implemented the Intercompany intercompany sales mechanism, which allows you to solve problems associated with the interaction of several companies (organizations) of the same holding in wholesale sales schemes.
1. Average per month in 1C:ERP Enterprise management performs calculations based on the average price for the reporting period without taking into account batches. The total cost value is used for both disposed goods and warehouse balances.
Monthly average = (Balance value + Receipt cost) / (Balance amount + Receipt amount)
Example:
In the 1st quarter, the company purchased materials (of the same name) at different prices from different suppliers:
10.01 200 pcs. 12 rub. for 2400 rub.
20.01 150 pcs. 15 rub. for 2250 rub.
28.01 150 pcs. 16 rub. for 2500 rub.
05.02 100 pcs. 14 rub. for 1400 rub.
14.02 200 pcs. 17 rub. for 3400 rub.
Total 800 pcs. for 11950 rub.
In January 330 pcs. materials went into production, 200 pcs. - in February.
(2400+2250+2500) / 500 = 14.3 per piece. (330 * 14.3 = 4719 rubles) in January
(500-330) * 14.3 = 2431 rub. – balance as of 01.02
(2431+1400+3400) / 470 = 15.4 per piece. (200*15.4=3080 rub.) in February
(170+300-200) * 15.4 = 4151 rub. - balance as of 01.03
2. FIFO weighted assessment in 1C:ERP Enterprise management
When calculating cost using the FIFO method, batches of retired goods are determined, separating them from batches of residuals.
Then, for retired (sold, written off) lots, the average cost of disposal is determined, which reflects the consumption of each lot.
The cost of inventory and the cost of disposal of goods may differ.
Cost of any batch for the month = (balance in value at the beginning of the month + receipt in value during the month) / (balance in quantity at the beginning of the month + receipt in quantity during the month)
Implementation example: FIFO weighted average
Sales 5 pcs. goods
Sales 10 pcs. goods
3. FIFO rolling valuation in 1C:ERP Enterprise Management calculates the consumption of goods in order of receipt, i.e. if one item of the nomenclature arrived earlier than another item that arrived later, then the first one will be written off earlier.
Performs FIFO cost calculations as part of full batch accounting.
Why do we need batch accounting?
Implementation example: FIFO moving average
Sales 5 pcs. goods
Sales 10 pcs. goods
This leaves us with a quarter of the second batch, i.e. cost of the balance = cost of the second batch.
3500/20 = 175 rubles per piece. (or 875 rubles for 5 pieces left)
3. By FIFO (rolling valuation) we will have half of the last batch left, i.e. the cost of the remainder will coincide with the cost of 1 unit of goods of the last batch, i.e. 200 rubles and, accordingly, the cost of the balance:
5pcs X 200rub = 1000rub.
Thank you!
Appendix 1 to the Guidelines for accounting of inventories, approved by Order of the Ministry of Finance Russian Federation dated December 28, 2001 No. 119n
Calculations of write-off of materials using average cost methods, FIFO
The first option is by determining the average cost (weighted estimate)
| Item No. | Contents of operations | Quantity, kg | Purchase price, rub. | Amount, rub. |
| 1 | 2 | 3 | 4 | 5 |
| A. INITIAL DATA | ||||
| 1 | Balance as of January 1 | 1000 | 5 | 5000 |
| 2 | Received in January: | |||
| First batch | 6000 | 10 | 60000 | |
| Second batch | 4000 | 12 | 48000 | |
| Third batch | 20000 | 20 | 400000 | |
| Total received for January | 30000 | 508000 | ||
| Total with balance at the beginning of the month | 31000 | 513000 | ||
| 3 | Released in January: | |||
| - for production | 16000 | |||
| - for sale | 1000 | |||
| 5000 | ||||
| Total released | 22000 | |||
| 4 | Balance as of February 1 | 9000 | ||
| B. WRITTEN OFF MATERIAL ACCORDING TO THE AVERAGE COST METHOD | ||||
| 5 | Average price in January: 513000 / 31000 = 16.55 | |||
| 6 | Total is written off in January (see clause 3) | |||
| 7 | Including: | |||
| - for production | 16000 | 16,55 | 264800 | |
| - for sale | 1000 | 16,55 | 16550 | |
| - service industries and farms | 5000 | 16,55 | 82750 | |
| Total | 22000 | 364100 | ||
| 8 | Balance as of February 1 | 9000 | 16,54 | 148900 |
| B. WRITING OFF MATERIAL USING THE FIFO METHOD | ||||
| 9 | Used in January | |||
| including: | ||||
| - at the price of the balance at the beginning of the month | 1000 | 5 | 5000 | |
| - at the price of the first batch | 6000 | 10 | 60000 | |
| - at the price of the second batch | 4000 | 12 | 48000 | |
| - at the price of the third batch | 11000 | 20 | 220000 | |
| Total written off | 22000 | 15,14 | 333000 | |
| Including: | ||||
| - for production (including rounding) | 16000 | 15,14 | 242160 | |
| - for sale | 1000 | 15,14 | 15140 | |
| - service industries and farms | 5000 | 15,14 | 75700 | |
| Total (including rounding) | 22000 | 15,14 | 333000 | |
| 10 | Balance as of February 1 | 9000 | 20 | 180000 |
Notes
1) Point 9 of the calculation shows the sequence of writing off material using the FIFO method: first, the balance at the beginning of the month is written off, then receipts to reporting month: first the first batch, then the second, etc., until the total quantity to be written off is reached given month(in the example 22000 kg). From the receipts of the third batch of 20,000 kg, only 11,000 kg were taken - as much as is needed to ultimately produce 22,000 kg.
2) Materials released in a given month (for production, sale, service industries and farms and for other purposes) are written off in amounts determined based on average price, which is determined by dividing the total amount written off in a given month by the amount of material written off.
In our example, the average price for January was:
- according to the average cost method - 513000 / 31000 = 16.55 (clause 5);
- according to the FIFO method - 333000: 22000 kg = 15 - 14 (clause 9, total);
Actual amounts written off have small differences compared to estimated amounts due to rounding of the average monthly price.
3) The balance of material at the beginning of the next month using the FIFO method is determined (clause 10):
- gr. 3 - from the source data (clause 4);
- gr. 5 = item 1 + item 2 (total) - item 9 (total);
- gr. 4 = gr. 5 / gr. 3 (on the same point).
4) The cost of materials issued (written off) using the FIFO method can be determined in a simplified, calculated way, when the cost of the material is first established, carried over to the next month, and the remaining amount is written off in the reporting month. In our example it looks like this:
The second option is by determining the price at the time of material release (sliding price)
The method of writing off materials at average monthly prices provided in the first option may cause inconvenience when practical application this option due to the fact that the price, as a rule, can only be determined at the end of the month, after calculating monthly turnover.
An organization can use the second option for valuing material by determining the price based on the condition of the material at the time of release, without waiting for the end of the month.
In this case, recalculation of the average price of the material can be carried out based on the option chosen in the organization (average cost, FIFO) at the time (as) of each material issue. In this case, the calculation algorithm is similar to the procedure outlined in the first option.
Currently, for accounting purposes, the following methods are used to estimate the cost of inventory:
- at the cost of each unit;
- at average cost;
- at the cost of the first acquisition of inventories (FIFO method).
For tax accounting purposes, an organization may use the following methods for assessing inventories upon disposal:
- valuation method based on the cost of a unit of inventory;
- average cost valuation method
- valuation method based on the cost of first acquisitions (FIFO);
- valuation method based on the cost of recent acquisitions (LIFO).
- when determining size material costs when writing off raw materials and materials used in the production (manufacturing) of goods (performing work, providing services), the methods are enshrined in paragraph 8 of Article 254 of the Tax Code of the Russian Federation;
- When selling purchased goods, the methods are enshrined in clause 3, clause 1 of Art. 268 Tax Code of the Russian Federation;
- upon sale or other disposal valuable papers the methods are enshrined in clause 9 of Art. 280 Tax Code of the Russian Federation.
This is explained by the desire to bring domestic accounting standards closer to international ones. However, for tax purposes, four methods of valuing inventories are still used.
Let's briefly describe each of the methods.
At the cost of each unit inventories used by the organization in special order(precious metals, precious stones, etc.), or supplies that are not normally interchangeable. This method is used in exceptional cases or with a small range of inventory items. It is characterized by particular labor intensity, provided that it is used in enterprises with a large product range.
For example.
The company produces cabinet furniture. The balance at the beginning of the stained glass month is 5 sheets in the amount of 125,000.00 rubles.
During the month, the following was purchased: 3 sheets of stained glass for the amount of 84,000.00 rubles.
Transportation costs are included in the cost and amount to 3,000 rubles.
Within a month, 2 sheets from the remainder were used, 1 sheet from the supply of stained glass.
Let's determine the actual cost of the balance: 125,000 / 5 = 25,000 rubles per sheet;
Let's determine the actual cost of receipt: (84,000 + 3,000) / 3 = 29,000.00 rubles per sheet;
The cost of raw materials consumed in the production process per month will be: 25,000 * 2 + 29,000 = 79,000 rubles.
As the example shows, when using this method there is no need to produce additional calculations. If it is possible to accurately determine which materials are used in production, the use of this method has advantages, since materials are written off at their real cost, without deviations.
Average cost calculation is made by dividing the total cost of a group (type) of inventory by its quantity, which consists of the cost and the amount of balance at the beginning of the month and the inventory received during the month. This method is the most common and is included in standard versions of accounting programs.
For example, an organization is engaged in the production of cabinet furniture. The balance of chipboard at the beginning of the month is 300 sheets in the amount of 600,000.00 rubles.
During the month, receipts were made in several batches, including:
- 100 sheets in the amount of 180,000.00 rubles;
- 50 sheets in the amount of 105,000.00 rubles.
Let's calculate the average cost of one sheet of chipboard: (600,000 + 180,000 + 105,000) / (300 + 100 + 50) = 885,000 / 450 = 1,966.67 rubles per sheet.
Let's calculate the cost of chipboard written off for production: 410 * 1,966.67 = 806,334.70 rubles.
The balance of chipboard at the end of the month will be 300 + 150 - 410 = 40 sheets in the amount of 40 * 1,966.67 = 78,666.80 rubles.
P using the FIFO method Inventories that are the first to enter production (sale) are valued at the cost of inventories that were first acquired in time, taking into account the cost of inventories listed at the beginning of the month. Thus, the sequence of write-offs when applying this method is as follows: first, balances at the beginning of the period are written off, then the first batch, then in order. Otherwise, this method can be called a conveyor method. In conditions of rising prices for purchased materials, the cost of purchased products is minimal, while the assessment of inventories and profits is maximum. And when prices fall, on the contrary, inventories and profits are minimized.
When using the FIFO method when calculating the cost of materials released into production, you can use one of the following methods:
The first method is based on writing off the cost of each batch in order: first, the cost of the balance is written off, if the amount of materials written off is greater than the balance, the first batch received is written off, then the second and subsequent ones. The balance of materials is determined by subtracting the cost of written-off materials from the total cost of materials received during the month (taking into account the balance at the beginning of the month).
The second method is based on determining the balance of materials at the end of the month at the price of the most recent 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).
Using the conditions of the previous example, we will calculate using the FIFO method using two options.
Option 1:
Written off for production:
300 sheets in the amount of 600,000.00 rubles; 100 sheets in the amount of 180,000.00 rubles; 10 sheets worth 21,000.00 rubles. Total: 801,000.00 rubles. The balance at the end of the month is 40 sheets in the amount of 84,000.00 rubles.
Option 2:
The balance of chipboard at the end of the month is 40 sheets (300 + 150 - 410), the entire balance from the second batch. Accordingly, the cost of the balance is: 84,000.00 rubles;
Let's calculate the cost of written-off chipboard: 600,000 + 180,000 + 105,000 - 84,000 = 801,000.00
The average cost of one sheet of chipboard written off for production is 801,000 / 410 = 1,953.66 rubles per sheet.
With the LIFO method Inventories that are the first to enter production (sale) are valued at the cost of the last in the acquisition sequence. The LIFO method is the opposite of the FIFO method. In conditions of rising prices - a minimum estimate of reserves and profits. In conditions of falling prices - maximizing inventory valuation and profit.
There are two ways to calculate the cost of materials released into production using the LIFO method. The methods are similar to those above for the FIFO method, with the difference that for the first calculation option the cost of the last received batch is used, then the batches are written off in reverse order. The cost of the earliest purchased batch is used to determine the closing balance. For brevity, we will use the last method of calculation.
The conditions of the example are the same.
The balance of chipboard at the end of the month is transferred from the balance at the beginning of the month, since 410 sheets of chipboard were used for production, of which 50 sheets were from the last batch, 100 sheets from the first batch, 260 sheets from the balance at the beginning of the month.
So, the balance will be 40 sheets at a price of 2000 rubles per sheet, in the amount of 80,000.00 rubles.
Let's determine the cost of chipboard used for production: 600,000 + 180,000 + 105,000 - 80,000 = 805,000.00
The average cost of 1 sheet of chipboard written off for production is 1963.41 rubles.
Let us make a reservation that in practice there are two options for using methods of average estimates of the actual cost of inventory items when released into production or written off for other purposes:
The first involves a weighted assessment based on the average monthly actual cost; in this case, the calculation includes the quantity and cost of materials at the beginning of the month and all receipts for the month (reporting period).
The second method is based on determining the actual cost of the material at the time of its release (rolling estimate); in this case, the average estimate is calculated based on the quantity and cost of materials at the beginning of the month and all receipts until the time of release.
Thus, the choice of the date on which the inventory is assessed determines the difference between the weighted and rolling assessment.
The use of a rolling assessment must be economically justified and supported by appropriate computer technology.
Options for calculating average estimates of the actual cost of materials for accounting and tax accounting purposes should be disclosed in accounting policy organizations.
Let's compare the results:
| Index | Average cost method | FIFO method | LIFO method |
| Written off for production (RUB) | 806 334,70 | 801 000,00 | 805 000,00 |
| Average cost of items written off in production (RUB) | 1 966,67 | 1953,66 | 1963,41 |
| Balance at the end of the month (RUB) | 78 666,80 | 84 000,00 | 80 000,00 |
| Average cost of materials in balance | 1 966,67 | 2 100,00 | 2 000,00 |
In the example given, there is no clear tendency for the values obtained to differ when applying in various ways estimates of inventories, since the conditions of the example provide for fluctuations in the purchase price of materials. So the cost of the balance at the beginning is 2,000.00 rubles, in reporting period materials were purchased at prices of 1,800.00 and 2,100.00 rubles.
Subject to a steady increase in prices, the most profitable, undoubtedly, is the LIFO method, since the cost of written-off inventory items increases, and profit, accordingly, decreases. When prices decline, the exact opposite pattern occurs when applying the FIFO method. To avoid jumps, accountants, as a rule, choose the method of writing off inventories at average cost for both accounting and tax purposes. This method is time-tested and does not cause difficulties in calculations, and also gives average indicators for any changes in prices on the market.
To accept the faithful management decisions In the field of inventory management, there is a need to choose a method for valuing inventories for accounting purposes.
For tax purposes, one or another method of assessing materials is used to optimize taxation, in particular to reduce income tax payments, provided that the method that provides for write-off for reduction is chosen. tax base maximum possible expenses.
Consequences of applying different methods of inventory valuation for accounting and tax purposes.
How to take into account the differences that arise when applying different methods of valuing inventories for accounting and tax purposes. In this case, it becomes necessary to apply the requirements of PBU 18/02.
So, the organization uses different methods for valuing inventories for accounting purposes and for tax purposes. What differences arise?
If the amount of expenses reflected in the accounting records exceeds the amount of expenses accepted for taxation, a deductible temporary difference arises, and, as a consequence, a deferred tax asset (DTA). If the amount of expenses reflected in the accounting records is less than the amount of expenses accepted for calculating income tax, a taxable temporary difference arises, and, as a result, a deferred tax liability. Let's look at how differences arise based on our example data.
When calculating by the average cost method, the amount attributable to the cost is 806,334.70 rubles, with the FIFO method - 801,000.00 rubles, with the LIFO method 805,000.00 rubles.
| Applicable assessment of the MPZ for the purposes | Differences that arise | SHE/IT | |
| Accounting | Taxation | ||
| At average cost 806 334,70 | Using the FIFO method 801 000,00 | Deductible temporary difference | SHE |
| At average cost 806 334,70 | Using the LIFO method 805 000,00 | Deductible temporary difference | SHE |
| Using the FIFO method 801 000,00 | At average cost 806 334,70 | IT | |
| Using the FIFO method 801 000,00 | Using the LIFO method 805 000,00 | Taxable temporary difference | IT |
The optimal method for assessing inventories for tax accounting purposes in organizations that apply a simplified taxation system is the FIFO method, since the method of assessing inventories at average cost for the purposes of tax accounting of expenses under the simplified tax system does not allow compliance with the requirements of Art. 346.17 of the Tax Code of the Russian Federation, regarding control of payment of expenses. At the same time, the organization retains the opportunity to keep track of inventories “on average” in accounting.
Of course, the emergence of differences between accounting and tax accounting leads to complication of the accounting process, as a result to a greater number of errors. However, market conditions, the presence of multiple user approaches financial statements(for example, it is beneficial for an organization to show profits in order to pay larger dividends) and last changes legislation increases the number of situations where these differences arise. In addition, if the range of materials (goods) is small and the accountant has the option of batch accounting, you should think about whether the weighted average valuation method is convenient and practical from a tax point of view.
The method of writing off materials at the cost of each unit is convenient for use in cases where an organization uses a small range of materials in production and you can easily track which batch the materials were written off from, and their prices remain fairly stable over 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 were accepted for accounting.
In addition, this method should be used to evaluate the following types of MPN:
· materials that are used in a special order precious metals, precious stones, radioactive substances and other similar materials;
· Inventories that cannot be routinely replaced with each other.
Paragraph 74 of Guidelines No. 119n proposes 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 amounts of acquisition costs that relate to different materials.
2. A simplified method, according to which only the cost of inventories at contract 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 contract prices. This method is used when it is impossible to accurately determine what share of transportation and procurement costs (hereinafter referred to as TPP) relates to each specific batch of purchased materials.
Example 1.
(1 option)
At the beginning of the month, organization “A” had 120 kilograms of paint remaining in the amount of 3,600 rubles at actual cost.
First batch 150 kilograms, batch cost 3,200 rubles.
Transport costs amounted to 1,000 rubles;
Second batch 200 kilograms, batch cost 5,600 rubles.
Transport costs amounted to 1,000 rubles.
Accounting for materials is carried out with the inclusion of fuel and equipment in the actual cost. To simplify calculations, all amounts are given without value added tax (hereinafter referred to as VAT).
The actual cost of paint is:
Balance at the beginning of the month: 3,600 / 120 = 30 rubles.
First batch: (3,200 + 1,000) / 150 = 28 rubles per 1 kilogram.
Second batch: (5,600 + 1,000) / 200 = 33 rubles per 1 kilogram.
Used during the month:
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 used paint is:
100 x 30 + 90 x 28 + 120 x 33 = 9,480 rubles.
End of the example.
Example 2.
(option 2)
Organization “A” uses a simplified method of writing off materials at the cost of each unit.
At the beginning of the month, “A” includes 120 kg of paint worth 3,100 rubles at negotiated prices. Transport costs 500 rubles.
Two batches of paint were purchased within a month:
1) 150 kilograms, batch cost 3,200 rubles. Transport costs 1,000 rubles.
2) 200 kilograms, batch cost 5,600 rubles. Transport costs 1,000 rubles.
The cost of paint at negotiated prices is:
Balance at the beginning of the month: 3,100 / 120 = 25.83 rubles.
First batch: 3,200 / 150 = 21.33 rubles.
Second batch: 5,600 / 200 = 28 rubles.
Within a month the following were put into production:
100 kg of paint from the remainder at the beginning of the month;
90 kg of paint from the first batch;
120 kg of paint from the second batch.
The cost of paint supplied to production per month at contract prices is: 100 kilograms x 25.83 rubles + 90 kilograms x 21.33 rubles + 120 kilograms x 28 rubles = 8,132.70 rubles.
Let's calculate the percentage of TZR:
(500 + 1,000 + 1,000) / (3,100 + 3,200 + 5,600) x 100 = 21.01%
The amount of technical and production work related to the increase in the cost of paint released into production:
8,132.70 rubles x 21.01% = 1,708.68 rubles.
End of the example.
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 accurately determine which materials are written off.
In cases where it is impossible to accurately track which materials from which particular batch were released into production, it is advisable to use one of the three methods described below.
In accordance with paragraph 18 of PBU 5/01, the method of writing off inventories at average cost is as follows. For each type of materials, the average unit cost is determined as the quotient of dividing the total cost of these materials (the sum of the cost of materials at the beginning of the month and those received during the month) by the quantity of these materials (the sum of the balance at the beginning of the month and those received during the month).
The cost of materials written off for production is determined by multiplying their quantity by the average cost. The cost of the balance at the end of the month is determined by multiplying the amount of material on balance by the average cost. Thus, the average unit cost of materials may vary from month to month. The balance of inventory accounts is reflected at average cost.
Example 3.
Suppose that in organization “A” at the beginning of the month the balance of fabric is 1,500 meters, the average cost is 95 rubles per 1 meter. Within a month the fabric arrived:
1st batch: 1,000 meters at a price of 89.50 rubles per 1 meter;
2nd batch: 500 meters at a price of 100 rubles per 1 meter;
3rd batch: 1,200 meters at a price of 80 rubles per 1 meter.
Within a month, 3,500 meters of fabric were used to produce.
The average cost of fabric is:
(1,500 x 95 + 1,000 x 89.50 + 500 x 100 + 1,200 x 80) / (1,500 + 1,000 + 500 + 1,200) = 90 rubles per 1 meter.
The cost of 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 meters.
The cost of the remaining fabric at the end of the month: 700 x 90-00 = 63,000 rubles.
End of the example.
Note!
The Letter of the Ministry of Finance of the Russian Federation dated March 10, 2004 No. 16-00-14/59 “On accounting of inventories” provides an explanation of the use of methods of average estimates, the actual cost of materials:
“In accordance with Order of the Ministry of Finance of Russia dated December 28, 2001 No. 119n “On approval of Guidelines for accounting of inventories”, paragraph 78, the use of methods for average estimates of the actual cost of materials released into production or written off for other purposes, provided for in subparagraphs “b”, “c”, “d” of paragraph 73 of these Guidelines, can be carried out in the following options:
- based on the average monthly actual cost (weighted estimate), which includes the quantity and cost of materials at the beginning of the month and all receipts for the month (reporting period):
- by determining the actual cost of the material at the time of its release (rolling estimate), while the calculation of the average estimate includes the quantity and cost of materials at the beginning of the month and all receipts until the moment of release.
The use of a rolling assessment must be economically justified and supported by appropriate computer technology.
Thus, there are no restrictions, with the exception of a purely economic factor arising from the “principle of rational accounting,” in the application of these options for average estimates.”
The difference between weighted and rolling estimating is the choice of date on which the raw materials are valuated. When using a weighted assessment, the assessment is made at the reporting date, and when using a sliding assessment, at the time of writing off raw materials and materials for production.
Example 4.
(In the example, the figures are given without VAT)
At the beginning of the month, the accounting records of organization “A” included 500 meters of fabric leftovers for the production of garments in the amount of 25,000 rubles. The average cost of 1 meter of fabric is 50 rubles.
Within a month, warehouse “A” received:
2nd: 100 meters of fabric at a price of 45 rubles for a total of 4,500 rubles;
10th: 200 meters of fabric at a price of 52 rubles for a total of 10,400 rubles;
25th: 300 meters of fabric at a price of 47 rubles for a total of 14,100 rubles.
Within a month, 700 meters of fabric were released into production, including:
17th 400 meters;
27th 300 meters.
1. Organization “A” applies a weighted assessment (the assessment is made as of the reporting date).
Let us determine the quantity and cost of fabric received during the month, taking into account the quantity and cost of fabric at the beginning of the month:
500+ 100 + 200 + 300 = 1,100 meters.
25,000 + 4,500 + 10,400 + 14,100 = 54,000 rubles.
The average price of 1 meter of fabric per month will be:
54,000 rubles / 1,100 meters = 49.09 rubles.
Cost of fabric written off during the month:
700 meters x 49.09 rubles = 34,363 rubles.
Remaining fabric at the end of the month: 1,100 700 = 400 meters.
Cost of remaining fabric at the end of the month: 54,000 34,363 = 19,637 rubles.
19,637 rubles / 400 meters = 49.09 rubles.
2. Organization “A” applies a rolling assessment (the assessment is made on the date the materials are written off for production).
The first batch of fabric was released into production on the 17th, therefore, when using this method, the average cost of fabric on this date should be determined.
Let’s determine the quantity and cost of fabric received (taking into account the balance at the beginning of the month) on the 17th:
500 + 100 + 200 = 800 meters.
25,000 + 4,500 + 10,400 = 39,900 rubles.
Average cost of 1 meter of fabric: 39,900 rubles / 800 meters = 49.88 rubles.
On the 17th, 400 meters of fabric were released into production, its cost will be:
400 meters x 49.88 rubles = 19,952 rubles.
Now you need to determine the quantity, cost and average cost of 1 m of fabric remaining in the warehouse on the 18th:
800 meters 400 meters = 400 meters.
39,900 19,952 = 19,948 rubles.
19,948 rubles / 400 meters = 49.87 rubles.
The next batch of fabric was released for production on the 27th, but on the 25th another batch of fabric in the amount of 300 m was received at the warehouse in the amount of 14,100 rubles. Therefore, it is necessary to determine the average cost of 1 meter of fabric as of the 27th.
Let's determine the quantity and cost of 1 meter of fabric received from the 18th to the 27th (taking into account the balance on the 18th):
400 + 300 = 700 meters.
19,948 + 14,100 = 34,048 rubles.
The average cost of 1 meter of fabric at the time of release of the next batch will be:
34,048 rubles / 700 meters = 48.64 rubles.
The cost of fabric released for production on the 27th will be:
300 meters x 48.64 rubles = 14,592 rubles.
Remaining fabric at the end of the month: 700 300 = 400 meters.
Cost of fabric at the end of the month: 34,048 14,592 = 19,456 rubles.
Average cost of 1 meter of fabric at the end of the month (at the beginning of the next month):
19,456 rubles / 400 meters = 48.64 rubles.
The LIFO method (from 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 for production in the reverse order of the order in which they were purchased. Materials from previously purchased batches are not written off until the last one is used up. Under the LIFO method, materials released into production are valued at the actual cost of the materials that were most recently acquired, and the balance of materials at the end of the month is valued at the cost of the materials that were most recently acquired.
In the event that the first batches purchased in time are cheaper, and 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 used, the amount of income tax will increase.
The literature suggests two methods 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 quantity of materials written off is greater than this batch, the previous one is written off, and so on. The balance of materials is determined by subtracting the cost of written-off materials from the total cost of materials received during the month (taking into account the balance at the beginning of the month).
2. The balance of materials at the end of the month is determined at the price of the first purchases. 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 6.
Let's use the conditions of the previous example.
At the beginning of the month, the remaining paint amounted to 100 cans at a price of 35 rubles per can.
The balance at the beginning of the month is: 100 x 35 = 3,500 rubles.
Within a month we received:
1 batch: 120 cans at a price of 40 rubles per can;
2nd batch: 80 cans at a price of 45 rubles per can;
3rd batch: 100 cans at a price of 50 rubles per can.
Total cost of paint received:
120 x 40 + 80 x 45 + 100 x 50 = 13,400 rubles
During the month, 270 cans of paint were written off for production, the balance 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) was written off completely, then the second batch (80 cans) was written off. Since the total quantity is larger, the remaining quantity is written off from the first batch: 270 – (100 + 80) = 90 cans.
Cost of scrapped paint:
100 x 50 + 80 x 45 + 90 x 40 = 12,200 rubles.
The average cost of one can of scrapped paint is:
12,200 / 270 = 45.19 rubles.
The cost of the remaining paint is:
(3,500 + 13,400) 12,200 = 4,700 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 this data is needed to correctly assign materials to specific batches when written off in subsequent months.
The balance is:
From the first batch: 120 90 = 30 cans for the amount of 30 x 40 = 1,200 rubles;
The paint, which was the balance at the beginning of the month, is fully included in the balance at the end of the month: 100 x 35 = 3,500 rubles.
Option 2.
The balance at the end of the month is 130 cans, and the paint included in the balance at the beginning of the month (100 cans) remains unused and 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 + 30 x 40 = 4,700 rubles.
The cost of scrapped paint is:
(3,500 + 13,400) 4,700 = 12,200 rubles.
Average cost of one can of scrapped paint:
12,200 / 270 = 45.19 rubles.
End of the example.
Thus, under the LIFO method, the cost of scrapped materials and remaining balance is also the same when using both options. With the second option, it is enough to accurately determine which materials from which batches make up the balance in the warehouse, and the cost of written-off materials is determined by calculation without necessarily being allocated to a specific batch, whereas with the first option, it is necessary to accurately determine from which batches the materials are written off and remain at the end month. If you frequently purchase materials, the first option is inconvenient due to the complexity of the calculations.
When using the methods of writing off inventories at average cost, FIFO or LIFO the calculated values of the cost of written-off materials and balances at the end of the period differ from each other. This, in turn, affects the cost of production, and accordingly, the amount of profit. Therefore, when choosing a material write-off method, you need to determine which criteria are the most important.
Example 7.
At the beginning of the month, the balance of materials in organization “A” was 300 units at a price of 110 rubles per unit for a total amount of: 300 x 110 = 33,000 rubles.
Within a month we received:
1st batch: 500 units at a price of 130 rubles per unit for a total amount of 65,000 rubles;
2nd batch: 600 units at a price of 170 rubles per unit for a total amount of 102,000 rubles;
3rd batch: 200 units at a price of 180 rubles per unit for a total amount of 36,000 rubles.
Total cost of materials:
33,000 + 65,000 + 102,000 + 36,000 = 236,000 rubles.
A) Average cost method.
The average unit cost is: 236,000 / 1,600 = 147.50 rubles.
The cost of written-off materials is: 1,200 x 147.50 = 177,000 rubles.
The balance at the end of the month is: 400 x 147-50 = 59,000 rubles.
B) FIFO method.
Balance at the end of the month: 200 x 180 + 200 x 170 = 70,000 rubles.
Cost of written-off materials: 236,000 70,000 = 166,000 rubles.
Average cost per unit of written-off materials: 166,000 / 1,200 = 138.33 rubles.
B) LIFO method.
Balance at the end of the month: 300 x 110 + 100 x 130 = 46,000 rubles.
Cost of written-off materials: 236,000 46,000 = 190,000 rubles.
Average cost per unit of written-off materials: 190,000 / 1,200 = 158.33 rubles.
Let's combine the results into a table:
When applying the LIFO method, the cost of written-off materials is maximum, while the cost of production increases and, accordingly, profit decreases.
When using the average cost write-off method, the cost of written-off materials and, therefore, the cost of production is less determined by price fluctuations and can remain at a fairly stable level.
From this we can draw the following conclusion: the LIFO method is convenient for minimizing income taxes. The FIFO method is the most disadvantageous for these purposes, since in this case taxes increase. However, if an organization aims to obtain maximum profit and, consequently, increase the amount of dividends paid, it is more convenient to use the FIFO method. In addition, this method allows you to obtain more reliable data on the cost of written-off materials and the cost of production, since in practice materials are usually written off in the order they were received.
These conclusions hold true if material prices rise. If prices for materials tend to decrease, then the FIFO method becomes more convenient for minimizing taxes, and the LIFO method is least suitable for these purposes. The average cost method still produces averages.
To demonstrate the advantages and disadvantages of various methods of writing off inventories, we examined options in which prices for materials either constantly increase or constantly decrease. In practice, prices for materials can either increase or decrease. In this case, the differences between the methods are not so obvious.
Example 8.
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 rubles per unit for a total amount of 33,000 rubles.
Within a month we received:
1st batch: 500 units at a price of 170 rubles per unit for a total amount of 85,000 rubles;
2nd batch: 600 units at a price of 180 rubles per unit for a total amount of 108,000 rubles;
3rd batch: 200 units at a price of 130 rubles per unit for a total amount of 26,000 rubles.
Total quantity 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 + 85,000 + 108,000 + 26,000 = 252,000 rubles.
During the month, 1,200 units were consumed.
Balance at the end of the month: 1,600 1,200 = 400 units.
A) Average cost method.
The average unit cost is: 252,000 / 1,600 = 157.50 rubles.
The cost of written-off materials is: 1,200 x 157.50 = 189,000 rubles.
The balance at the end of the month is: 400 x 157.50 = 63,000 rubles.
B) FIFO method.
Balance at the end of the month: 200 x 130 + 200 x 180 = 62,000 rubles.
Cost of written-off materials: 252,000 62,000 = 190,000 rubles.
Average unit cost of scrapped materials:
190,000 / 1,200 = 158.33 rubles.
End of the example.
As we can see, in the conditions of this example, all three methods give similar results, and when using the average cost and FIFO methods, the obtained values are almost the same. Depending on price movements, there may be situations where average cost and LIFO, or FIFO and LIFO, or all three methods will produce the same results.
For more information on issues related to the write-off of inventories for production, you can read the book by the authors of BKR-INTERCOM-AUDIT JSC “Inventories”.
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