Inventory Valuation Methods.how to assess stocks in terms of the dynamics of their purchase prices? Possible answers to this question are the so-called methods of estimating reserves.Inventory valuation method is one of the methods used by companies in assessing stock inventories according to business needs .
In modern practice, four methods for assessing the organization’s reserves are widely known:
1) estimates of the unit cost of inventory;
2) the method of average prices;
3) FIFO method and
4) LIFO method.
Methods of Inventory Valuation To Estimate Product And Stock
- Average Method (Average Cost)
Quoting from the Financial Accounting: Inventory Valuation module by Tri Kurniawati, the average cost method determines the price of goods in inventory based on the average cost of all similar goods available during the period. The trick is to use the calculation of the average cost per unit. For more details, please use the formula listed below:
Average: Total Inventory Price/ Unit Price
For example, you buy product A twice at different time levels. The price of the two is different because you order from different suppliers. So that the selling price is the same, you must add up all the products and then find the average price according to the formula above.
- FIFO (First In First Out) Method
The first-in, first-out (FIFO) method assumes that the company uses the goods in the order in which it purchased them. In other words, the FIFO method assumes that the first goods purchased are the first to be used (in a manufacturing case) or the first to be sold (in a merchandising concern). The remaining inventory should therefore represent the most recent purchases.
A suitable business using the FIFO method is a restaurant or supermarket which usually sells products with a certain period of use. By using FIFO, business owners will adjust their sales according to the product that is closest to its expiration date . That way, they will not feel a loss because the product is damaged or stale.
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- LIFO (Last In First Out) Method
The last-in, first-out (LIFO) method matches the cost of the last item purchased against revenue. If Call-Mart Inc. Using a periodic inventory system, it is assumed that the total cost of the quantity sold or incurred during the month is derived from the most recent purchase.
An example of a type of business that uses the LIFO method is a clothing retailer. When the Marvel Black Panther movie trend, sales of koko Muslim clothes increased very rapidly. As a result, many business owners increase the selling price of the clothes so they can get a bigger turnover. If market demand stabilizes again, they will slightly ‘drive’ the price.
Thus a brief explanation of the inventory valuation methods. Hope it is useful!
