4. Base Stock Method :

Under this method,, according to Para 10 of AS 2, it is assumed that
a minimum quantity of inventory (or base stock) must be held at all times to carry on
business. Up to this quantity the inventory is valued at the cost at which it was acquired.
Any excess over this base stock may be valued under FIFO or LIFO method.
As this method assumes that a minimum level of stock must be maintained at all times, it
has a limited application. Where some basic raw materials are required and these are of
the same type. This method is suitable. It is applied in processing industries where processing
takes a considerable time.

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.