Inventory Valuation Methods: What They Are and Their Importance

The inventory valuation methods They are techniques that are used in order to select and apply specific bases that evaluate inventories at an economic level. This technique is of great importance when the prices for purchased units are different.

It is necessary for companies to be aware of the costs of their inventories, because otherwise, they would not be able to carry out the calculations of the prices of the goods sold, nor the value of existence of the same when the cycle of exploitation.

Because of this, these methods are the perfect tool to be able to know the value of inventories by monetary unitsand the price of the goodsthat have already been sold through time.

Inventory Valuation Methods

These methods have the ability to determine the value of the units that are stored. Currently there are several very useful methods, however, the most used are the following:

Specific identification

This consists of individually identifying the articles, this produces a level of certainty with a proportion that has a degree of complexity of its application.

FIFO method

In this method, it is traced that the first products obtained are the ones that are sold first, so only recently entered items will remain in the inventory. This means that it is a more realistic approach in practice, since it sells the items that have been in stock for the longest time, thereby reducing the risk of expiration.

LIFO method

The calculation of the inventory cost of this method is totally opposite to that of FIFO. This is because the entry of the last items is part of the inventory that will be sold first. In this method, you should not pay for the material at different prices, it can only be done when the most recent batch of articles has finished.

Weighted average

It consists of finding the average cost of the items individually that exist in the last inventory when the units are The same in their appearance, but not in their purchase price, regardless of whether they were purchased at different times and at different times. prices.

Inventory Valuation Systems

Understanding the fundamentals contained in the valuation systems are usually very useful for companies, since they are the ones that really set the point of production that is obtained during a period. The financial manager must have the corresponding information so that he can make decisions in relation to the organizational asset.

These systems are classified as:

Periodic inventory system

Through this system, you can determine the existing value of merchandise when carrying out an adequate physical count, which is called initial or final inventory depending on the case.

• The initial inventory is related in detail to the existence of the merchandise that the company presents at the beginning of its activities, after carrying out the physical count.
• The ending inventory is linked to the existence of merchandise after an accounting period.

Permanent inventory system

Through this system, the company can reach know at any time the value of the existing merchandise, without having to do the physical count, this is because the purchase and sale movements are recorded immediately when the transaction is made at its cost price.

Techniques for Inventory Valuation

Every company has to value its merchandise, so that it can value its inventories, calculate prices, measure the level of profit and fix the production related to the level of sale. Today the valuation techniques, for instance:

Assessment by specific identification

In companies there are inventories with the same merchandise, however, each of them includes some differences such as the brand or reference, characteristics of individual numbers and variation of costs.

Standard cost valuation

This system provides the convenience of auxiliary handling of Kárdex merchandise, since it only needs to carry the quantities by units that are the same.

Valuation at cost price

When an inventory is valued at cost price, it means that the company allows the merchandise to be related to the acquisition cost.

Importance of Inventory Valuation in Companies

The inventory valuation in companies It is very important, since it has a direct relationship with the control and good handling of products, therefore, it allows them to provide the customer with a better service and efficient production.

Consequently, the financial manager of the company has the duty to find a way to solve any problem that arises during the development of operations and also when conclude them.

This is due to the responsibility you have in the production, the allocation of the cost of sales and the goods that are in the inventory. In the same way, it allows the determination of the economic situation of the company during the specified period and the useful handling of the operating system.

Inside of importance of inventory valuation, the following objectives are included:

• The detention of costs in the inventory accounts until the products are sold.
• The adequate valuation of the final inventory, which will then be integrated into the state of the economic situation.
• You need to determine the cost of the purchased purchase inventory.
• The valuation corresponding to the amount of cost of sales, must be correct when facing the income of the period, since it has to be present in the statement of financial situations.