Inventory Costing and Valuation Methods

Understanding Product Costs and Inventory Valuation

Purchase Price

The purchase price refers to the cost of externally purchased products by the company. It is the total purchase amount plus all expenses incurred for the acquisition, such as transportation, insurance, and packaging.

Formula: Purchase Price = Invoiced Cost of Goods + Acquisition Expenses

Production Costs

Production costs are the sum of all expenses required to manufacture a product within the company. These include:

• Raw materials
• Other consumables
• Direct manufacturing costs
• Indirect company costs

Formula: Production Costs = Raw Materials + Other Consumption + Direct Manufacturing Costs + Indirect Company Costs

Direct Costs

Costs directly allocable to the manufacture of a specific product.

Indirect Costs

Costs not directly allocated to the manufacture of a specific product, which generally affect all products manufactured by the entire company.

Inventory Record Card (Stock Card)

An inventory record card is a document that provides a detailed, chronological record of entries and exits for each type of stock item, including its valuation.

Information Contained:

• Product Identification: Reference number or internal identification code, and suppliers (if not produced in-house).
• Inventory Management References:
  • Maximum and minimum stock levels.
  • Reorder point.
  • Safety stock level.
  • Supplier and delivery point utilized.
• Movement Logging: Description and chronological logging of stock movements, including inputs, outputs, and valued stock levels, with specification of the supplier for purchases (inputs) or the client for sales (departures).

Stock Valuation Methods

These are the different ways a company can economically evaluate and monitor inventory entries and exits.

Weighted Average Price (WAP) - PMP

Recommended for neutral situations or price instability.

This method calculates the average value of the initial stock and subsequent inputs, weighted by their quantities.

First-In, First-Out (FIFO)

Recommended for deflationary situations (falling prices).

Under this method, stocks are valued at the price of the first items that entered the store, and so on successively.

Last-In, First-Out (LIFO)

Recommended for inflationary situations (rising prices).

Under this method, leaving stocks are valued at the price of the last items that entered the store, in succession.