Inventory valuation methods

There’re several inventory valuation methods of deciding which items are deemed to be held in inventory:

1. unit cost inventory
2. first-in-first-out (FIFO)
3. last-in-first-out (LIFO)
4. average inventory cost.

Other possibilities are: stardard cost, selling price less gross margin.

Standard cost means the cost taking the normal levels of materials, labour, efficiency and capacity utilisation as determined by the costing system of the business.

Selling price less gross margin may be convenient for retailers for whom the selling price is more accessible than the cost price. The inventory is taken at selling price and then reduced to cost by deducting the appropriate percentage gross margin.

The objective inventory valuation methods are required for goods whose costs can be specifically identified. For other goods, we know the inventory valuation methods: FIFO and LIFO, IAS 2 nominates FIFO or weighted average as benchmark treatment, with LIFO as an allowed alternative. Standard cost or selling price less gross margin could only be used if it was clear that the resulting inventory figures approximate to the actual cost. If LIFO is used, some extra inventory disclosure are added.

Related posts:

1. Inventory valuation methods: FIFO and LIFO
2. Inventory disclosure
3. Inventory measurement
4. Cost of inventory
5. Average inventory cost