Stock Valuation Methods: PMP and FIFO Explained

Stock Valuation Principles

Company management must understand the value of products to plan short-term storage needs within production, trade, and finance. Stocks purchased externally are valued at the purchase price, while products manufactured internally are valued at the production cost.

Purchase Price

This is the total purchase amount according to the supplier's invoice, plus all expenses generated by the operation (transport, insurance, packaging, and non-deductible taxes).

Acquisition Price = Invoiced amount of goods + Operational costs

Cost of Production

This represents the money spent on raw materials and supplies consumed in manufacturing, direct production costs (labor, energy, etc.), and the proportion of indirect costs attributable to production.

Production Cost = Raw material consumption + Other direct production costs + Indirect company costs

Evaluation Criteria

Weighted Average Price (PMP)

This method involves calculating the average value of initial stocks and new entries, weighted by their quantities. The formula is:

PMP = (p1*q1 + p2*q2 + ... + pn*qn) / (q1 + q2 + ... + qn)

FIFO Criteria (First-In, First-Out)

The output value of products from the store is based on the price of the physical units that entered first (also known as PEPS in some regions).

Inventory Administration

Stock Control Sheet

This document records the rating of each stock type and provides a detailed chronological log of entries and exits. It includes:

• Product Identification: Reference or internal encoding and supplier details.
• Inventory Management References: Maximum and minimum stock levels, reorder points, safety stock, and provider delivery times.
• Valuation Method: The specific endpoint used (PMP or FIFO).
• Movement Log: A chronological record of stock inputs and outputs, including supplier specifications for purchases and customer details for sales.

Summary of Valuation Criteria

These are the various methods companies use to economically assess inventories and control the flow of materials.