Purchase Price & Cost of Production: Inventory Valuation

Purchase Price & Cost of Production

Purchase price: Is the total amount of the purchase, including all expenses related to the acquisition operation (transport, insurance, packaging, etc.).

Cost of production: Is the sum of all costs required to manufacture a product, such as labor, raw materials, or energy consumption.

This company knows, at every moment, the value of what has come to stores. This control is a tool that performs using an existence control tab, which is a document that registers, for each type of existence and valuation, a detailed timeline of entries and exits of the store.

Criteria for Valuation of Stocks

The criteria for the valuation of stocks are different ways how a company can economically evaluate the inventory and control inputs and outputs of materials. In particular, you must use a criterion evenly when there were specific material inputs at different prices, since then you must decide what will be the starting price.

We have studied the following criteria:

• PMP: Weighted Average Price: We calculate a weighted average of different rates of acquisition.
• FIFO: First In, First Out: Emerging stocks are valued at the price of the first ones that entered the store, successively.

Accounting standards (General Accounting Plan) define the official purchase price and the cost of production as follows:

Purchase price: Is the amount of cash and other equivalent items paid or unpaid, plus the fair value of other compensation arising from the acquisition committed, which must be directly related and necessary to put the asset in operating condition.

Cost of production: Includes the purchase price of raw materials and other supplies, the cost of factors of production directly attributable to the asset, and the party that reasonably appropriates production costs indirectly related to the asset, to the extent to which they refer to the period of production or manufacture. Construction is based on the level of capacity utilization, normal job, and the means of production necessary for the implementation of the asset in operating conditions, observable or contrasted.