Base Stock Method

Under this method, a minimum quantity of stock is always to be held in stores as fixed asset. The minimum stock is known as base stock and it should not be issued unless there is an emergency. The stock in excess of base stock would be issued in accordance with one of the methods of pricing of issue e.g. LIFO, FIFO, Average, etc. Thus it is not an independent method in itself.

The base stock method is a valuation technique for the inventory asset, where the minimum amount of inventory needed to maintain operations is recorded at its acquisition cost, while the LIFO method is applied to all additional inventory. This approach is not acceptable under generally accepted accounting principles.

Advantages:

(1) As already said this method is ideal for processing industries like refineries, taneries, etc.

(2) Base stock is always valued at its cost of acquisition.

(3) The additional stock over the basic requirement can be valued under any suitable method.

Disadvantages:

(1) Base stock is valued at historical cost. It is treated as a fixed asset, but there is no scope of depreciating it.

(2) The disadvantages of FIFO or LIFO exist regarding the valuation of additional stock.

(3) This method is somewhat rigid. It requires necessary changes to cope with changes of production capacity and policy matters regarding stock.