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Costing Methods in TallyPrime

TallyPrime offers you varied costing methods that will help you in determining the value of the stock in hand. You can know the worth of your inventory by selecting the suitable costing method as per your business requirements. Every stock item can be set up to have a different costing method if needed.

Depending on which method will provide better outcomes for your company, you can select any of the following costing methods at the beginning of a financial year.

• At Zero Cost
• Average Cost
• FIFO (First In, First Out)
• FIFO Perpetual
• Last Purchase Cost
• LIFO Annual (Last In, First Out)
• LIFO Perpetual
• Standard Cost
• Monthly Average Cost

At Zero Cost

Under this costing method, the value of stock items will always be zero, irrespective of the cost incurred. No matter what amount you have paid for procuring the stock items, their cost will not be listed and only the quantity will be shown in the book of accounts. This can be used for all consumables for which you don’t want to project the value in your books.

Average Cost

In TallyPrime, this is the default costing method for deciding the value of the stock in hand. If items you deal with in your business have fluctuating price trends, it is difficult for you to adopt the best valuation method. In such a case you can use the Average Cost valuation method to get the best results.
Suppose you purchased varied quantities of pencils at different rates across a period of time. The average cost of purchasing the pencils can be calculated as follows.

Average Cost = Total Cost/Total Quantity

                      = 82000/500
                      = 164
The value of the remaining stock can be calculated by multiplying the average cost with the quantity of the remaining stock.

FIFO (First In First Out)

This method is mostly applied when the first item that you purchase, or produce is the first one to be sold off. The older items are sold first which indicates that the remaining stock items after the sales, are from the most recent purchase or production. If the price of the item is increasing and you select the FIFO method for valuation, the value of closing stock inflates. That means the value of the remaining stock becomes higher.

Consider that you purchase and sell headphones and want to know the worth of the stock-in-hand. 

Value of the closing stock = Respective purchase cost * Closing quantity
                                          = 20*500+80*520
                                          = 51,600

On selecting this method, the leftover stock will be valued using the respective purchase cost as the reference.

When using this method, the calculated value of stock gets carried forward in your books. At the same time, the stock remaining at hand may be from current batches. Also, the cost of the opening stock in the new year will be calculated as an average as shown below.

Cost of the opening stock = 51600/100
                                           = 516

FIFO Perpetual

This valuation method is used when you are reporting inventory usage on a multi-year basis. If you have a company running for more than a year, on selecting this costing method, the stock valuation will be from the time the Company was created in Tally.

On selecting this method, the leftover stock will be valued using the last purchase price as the reference. Hence, if the price of the item is increasing year-on-year the value of closing stock inflates, regardless of the fact that stock is from a previous year.

When using this method, the quantity of stock gets carried forward in your books and the value of the stock is calculated based on the last (most recent) purchase price as the reference.

Last Purchase Cost

When the inventory valuation is based on the last purchase cost at which you procured the items, this method is used. Let’s suppose that you have made multiple purchases of an item on different days at varied rates. The inventory will be valued based on the last purchase cost of that item.

Here, the items may not be sold on a first-in first-out basis. Hence, stock from an older batch will also get valued at the latest purchase cost.

For instance, you purchased sneakers at varied rates over a period of time. While valuing the stock-in-hand, the rate at which you made the last purchase will be taken into account and the remaining items will be valued accordingly.

Value of the closing stock = Last purchase cost * Closing quantity
                                          = 530*130
                                          = 68900

On selecting this method, the leftover stock will be valued using the last batch of purchases as the reference. The value of the remaining sneakers will be calculated by multiplying the quantity of the remaining stock with the rate at which the last batch of sneakers was purchased. 

LIFO Annual (Last In First Out)

As opposed to the FIFO method, under this method, the last stock items that were purchased or produced are sold off first. This indicates that the stock-in-hand may be from any older batches.

Whether the price of stock items follows an increasing or a decreasing trend if you have selected the LIFO method, the value of the closing stock remains stable at the respective purchase costs.

Consider that you purchase and sell slippers and want to know the value of the stock in hand. 

Value of the closing stock = Respective purchase cost * Closing quantity
                                          = 100*200+50*190
                                          = 29500

On selecting this method, the leftover stock will be valued using the respective purchase cost as the reference.

When using this method, the calculated value of stock gets carried forward in your books. At the same time, the stock remaining at hand may be from older batches. Also, the cost of the opening stock in the new year will be calculated as an average as shown below.

Cost of the opening stock = 29500/150
                                           = 196.67

LIFO Perpetual

This valuation method is used when you are reporting inventory usage on a multi-year basis. If you have a company running for more than a year, on selecting this costing method the stock valuation will be from the time the Company was created in Tally.

In this method, the earliest entry of inventory in the system is considered as the first batch even if the entry was made 10 years ago. On selecting this method, the leftover stock will be valued using the respective purchase cost as the reference.

When using this method, the quantity of stock gets carried forward in your books and the value of the stock is calculated based on the respective purchase cost as the reference. Also, the stock remaining at hand may be from older batches.

Standard Cost

This valuation method determines the cost of stock items once a standard or predetermined cost is set. Once you define the Standard Cost, the rate is applicable for the inventories irrespective of the price of purchase or production. This method assigns a predetermined cost to every unit of the item such as material cost, labour, overhead prices, production costs, freight charges, packaging and so on. The frequent purchases of the item at different rates would not make a difference in the value of the inventory.

By identifying the difference between actual costs and standard costs, you will be able to manage finances and reduce wasteful spending on resources. This method provides accuracy in financial reporting. Companies that have to budget the cost of any item that is required to assemble the final product can benefit from this valuation method. 

Suppose you make sweatshirts, and the rate at which you purchased the items varies with time. You may incur expenses as shown in the table below.

On 1st October, you decided to define the standard cost as Rs 500. Therefore, once the Standard cost is determined, the remaining stock will be valued at 500. If you have 30 units remaining in total, then the value will be 30*500=15,000.

Monthly Average Cost

In the monthly average costing method, the closing value of each month will be treated as an opening for the next month. The average cost for purchasing the stock items will be calculated on a monthly basis and the value of the stock items is based on this calculation.