What is the Best Inventory Valuation Method

>> August 14, 2013


Today, I attended one call from Andhra pardesh Businessman. He is very confused to use any inventory method for valuation the closing stock. By using his accounting software, he find the different value of the closing stock which is not actual purchase price of his products.

So, he want to know this concept clearing and simple way. Technically, he is interested to know, "What is best inventory valuation method?" On this concept, I want to tell here.

There are lots of inventory valuation method like zero cost, zero price, average price, default, FIFO, FIFO Perpetual, last purchase cost, last sale price, LIFO annual, LIFO perpetual , monthly average cost, standard cost and standard price method. Main aim of all these methods to calculate estimated cost of closing stock.

To know the correct rate of closing stock is difficult than to know the quantity of closing stock. For calculating the quantity of closing stock, we can check physically. But, suppose, we have 10,00,000 items and each purchase price is different and at different time period, these changes very fastly. For example, in a year we purchase one item at different price $ 15, $ 10, $ 11,  $ 16, $ 17, $ 56, $18, $46, $49, $38. You see this one items prices have changed 10 times. But 10,00,000 items prices change 100 times, it means, it will be very difficult for us to find the correct rate of closing stock. So, accounting experts have made inventory valuation methods. As per me, all methods are best but it is on the accountant which method will he use for company. I think methods are medicine and accountant is the doctor, he can use any method on the basis of nature of items. Let me explain to give you rough idea.

FIFO is best : Why 

Suppose, your goods are perishable. You will be interested to sell all the goods which you have bought first, otherwise, you will not get its best price or it is the chance, these goods will become dead. So, it is best to use FIFO for inventory valuation method for these goods.

LIFO is best : Why

Suppose, your goods are durable and fashionable. You will be interested to sell all the goods which you have bought latest, otherwise, you will not get its best price or it is the chance, these goods' fashion will become dead. So, it is best to use LIFO  for inventory valuation method for these goods.

Average Cost is Best : Why

Suppose, you are operating big bazaar where you buy millions of goods from kitchen to electronics at different time at different price. So, do not take the tension and apply average cost method.

Related : Concepts of Inventory Management 






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