INVENTORY VALUATION METHOD

INVENTORY VALUATION METHOD

According to Enekwe (2010), stock valuation is a means of valuing materials which involve the determination of the cost of materials on hand at the end of a particular accounting period. When inventory are issued, it is pertinent that the firm assigns cost stocks issued for production. There are different valuation methods used by the firm which affect their profit differently.

There are various methods used to value stock and eventually ascertain the value of stock received, issued and the balance after issuing stock out.

Some of the methods are:
I. First-in-first-out (FIFO)

II. Last-in-first-out (LIFO)

III. Specific identification

IV. Weighted average.

V. Based stock

VI. Standard price

VII. Replacement price

VIII. Simple average price

A. FIRST-IN-FIRST-OUT (FIFO)

In fifo method, the units issued or sold at a given period are assumed to be first units that were placed in inventory materials are issued from oldest supply in stock and units, issued are placed at the oldest cost listed on the stock ledger sheet with materials on hand being the most recent purchase.

It s mainly used for food that are subject to deterioration or obsolesces, FIFO if method yield the greatest amount of profit during inflationary period because the cost of units sold is assumed to be the order in which they were incurred.

One advantage of FIFO is that it matches cost with revenue, it is inexpensive to operate, it is systematic and objective and less prone to movement manipulation than other inventory cost assumptions, especially LIFO.

However, during the period of rising prices, FIFO result in very bad matching on the final account as the closing stock and reported profit are overstated.

B. LAST-IN-FIRST-OUT (LIFO) METHOD

This is the opposite of FIFO in that the cost of material issued out for production or goods sold are based on the last unit placed in inventory while the remaining inventory consist of first good placed. This assumes that the most current cost of goods is to be charged to the cost of goods sold.

The cost of unit remaining in inventory represents the oldest cost available, and the issues are cost at the latest available. One advantage of LIFO is that it matches the most recently increased inventory cost against sale revenue.

During inflationary period, reported profit is most likely to be approximately the amount that really is available for distribution to owners whom tax is considered, LIFO provides the greatest tax deductibility and thus it result in the lowest tax burden.

C. SPECIFIC IDENTIFICATION METHOD

Under this method of inventory valuation a unique cost is attached to each item in inventory. When an item is sold inventory value is reduced by that specific amount. Specific identification method is used in term of stock such as automobile and heavy machinery in determining the cost off inventories under the historical cost concept. SAS4 recommends specific identification method for use.

D. WEIGHTED AVARAGE METHOD

The weighted average method involves the computation of the weighted average unity cost of goods available for sales from inventory and this average cost is the applied to the goods or material sold. All good sold are at their weighted average price. The weighted average method is unique in that issue price are calculated on receipts of inventories and not on their selves or issue.

Under this method, the cost of goods sold and the value of closing inventory fall somewhere been the ones obtained by the FIFO and LIFO methods, this will give a more realistic inventory value in the balance sheet and will lead to near accurate method is recommended by a SAS4 for determining of the historical inventory cost.

E. BASE STOCK METHOD

Though this method is conditionally recommended by IAS2, it is obvious that is not independent methods under this method a minimum level of stock, carried at the historical cost of acquisition is held at all time (SAS5 1986). Any addition to or excesses over the base stock are carried at different based such as FIFO, LIFO etc

F. STANDARD PRICE METHOD

Standard price method uses a predetermined price for pricing every method issued out. The standard price may be set over a given period of time say one year, after all factor, which may affect the price had been taken into consideration.

The use of standard price may result in profit the actual material price is less than the standard price or loss if the reverse is the case. The main aim of standard price system is to ensure efficiency purchase of materials the price variance that normally exist between standard and actual prices are usually written off to material price variance account

G. REPLACEMENT OF PRICE METHOD

This method of inventory valuation is a method whereby materials issues are price based on the current market prices that is, the time the issues or sales were made. This method of valuation is no longer regarded as acceptable the advantages are the issues are at current market value and calculations are simple. On the other hand it is different to be up to date with replacement prices. It is not easily practicable and it is not a traditional casting method.

H. SIMPLE AVERAGE METHOD

In the simple average price, stocks are issued at a price which is calculated by dividing the total prices of the materials in the stock from which the material to be priced could be drawn by the number of price used in total. The merit of the method is that it is simple to operate and in period of price fluctuation.