Valuing inventory

Unfortunately, there is no universally accepted method for valuing inventory. The value of Cinv per unit can be taken on any of the following bases ... 

Average-Cost Basis for Inventory Either a simple average or a weighted average can be used to value inventory cost. 

In both the average-cost and the standard-cost methods of valuing inventory, materials are not charged out at actual cost. Thus, the amount of profit or loss for the period may be varied by the method chosen to value the inventoiy. For this reason, accountants usually insist that the method of inventory valuation be consistent from period to period. This causes inertia but does not prevent a change of method men it can be justified. In such cases, it is usual to inform stockholders of the change because the influence on declared profits can be large. 

Valued inventory ranges compare total inventory value with total sales turnover. 

Figure 22.5 shows how product, customer, and market characteristics can determine different SCM strategies and design implications. For example, the strategic choice to serve niche customers with high price specialty chemicals is only tenable if the high-value inventory is centralized to reduce costs, and if a fast, responsive supply chain is set up to fill customer orders within the requested lead time from central inventory. 

The total profits (before tax) over the life of a project are independent of the method used to value inventory. Over a project life of n years, Eq. (9-148) can be written as... 

However, the annual profit A p (before tax) does depend on the value of the inventory. Since the tax payable in any individual year is based on A p, the net annual profit Aj j p (after tax) is also dependent on the method chosen for valuing inventory. Frequently, a particular method for valuing inventory is chosen to delay payment of tax as long as it is legally possible to do so. 

The value of the inventory 1 at any given time depends on the values ascribed to the units withdrawn from inventory. There are five methods for valuing inventory (1) FIFO (first-in-first-out), (2) LIFO (last-in-first-out), (3) average cost, (4) standard cost, and (5) market value. 

Unfortunately, there is no right or wrong way to value inventory, although certain methods are not allowed in certain countries for tax-assessment purposes. For example, LIFO is not allowed in the United Kingdom. As a general rule, the method used should be the one that gives the lowest tax liability. However, it is generally accepted that consistency is also a virtue in inventory valuation. 

It is important to realize that the method used to value inventory for cost accounting purposes is not necessarily the one used to draw up the balance sheet and financial accounts. In this case, inventory is valued either at the cost given by another method or at the market value, whichever is lower. 

Up to this point in this chapter, we have presented what is called traditional cost/managerial accounting. The traditional methods have helped finance departments monitor operations and value inventory, but some people feel that rather than providing accurate picture of a company s costs, this approach focused on direct costs and relied on arbitrary cost allocations such as labor-based overhead rates. 

In the theory of constraints (TOC) system, it is important to value inventory at the price for which the material was purchased. So, finished goods are carried in inventory only at the cost of the raw materials in them. The cost of... 

Inventory is typically valued at cost and reported on the balance sheet in this way. If the market value of the inventory is less than the actual cost of the inventory, then companies may reduce the inventory amount to the lower of cost or market value. Inventory costs include the amount to acquire the product plus the costs related to placing it in the location and condition ready for sale. This includes costs related to purchasing, transporting, and storing inventory. Purchasing costs decline by the amount of purchase returns, allowances, and discounts received. Further, manufacturers and assemblers add direct costs of production, such as labor and overhead, to the COGS. 

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