Inventory costing is one of the essential managerial terms, referring to the financial costs associated with purchasing goods or products and managing their storage.

Neglecting proper inventory management poses risks to both sales operations and the financial stability of a company, necessitating effective oversight and strategic planning.

To gain a deeper understanding of inventory costing and how to determine its value, we invite you to explore our article today on the topic of Inventory Costing.

What Is Inventory Costing?

Inventory is one of the most vital financial assets in a company and a primary source of profits. It is classified among current assets on the balance sheet.

We can define inventory as the goods or merchandise stored within a company’s warehouses. A successful business depends heavily on effective inventory management.

A cornerstone of this management is Inventory Costing, as stock levels fluctuate based on market conditions. Without proper costing, businesses risk financial crises or supply shortages.

Many accounting methods are used to determine inventory costing, depending on established accounting standards.

Methods of Inventory Costing

There are several methods used to calculate Inventory Costing, including:

Specific Identification

This is one of the simplest inventory costing methods and is suitable when the inventory consists of limited and distinct items.

Under this method, the cost of each item remaining in inventory is calculated based on its purchase price and book value.

Weighted Average Cost

Inventory costing can also be done by calculating the average purchase cost of an item or its weighted average price.

This involves:

• Determining the weighted average price using the formula:
  (Total cost of goods available / Quantity available = Weighted average price)

• Then calculating the inventory cost using:
  (Weighted average price × Quantity of remaining goods)

First In, First Out (FIFO)

This method assumes that the oldest goods purchased are the first to be sold. It is straightforward and commonly used in Inventory Costing.

It assigns the earliest costs to the cost of goods sold and the remaining costs to ending inventory.

Last In, First Out (LIFO)

Contrary to FIFO, this method assumes that the most recently purchased goods are sold first.

Here, the earliest costs are assigned to ending inventory, while the newest costs are assigned to the cost of goods sold.

Adjusting Inventory Value Based on Cost or Market Rule

Inventory value is sometimes adjusted using the “lower of cost or market” rule when the market value drops below the recorded cost.

This typically occurs due to inventory becoming obsolete or a market price decline and is used to reflect actual losses.

The adjustment process involves:

• Comparing cost and market value to choose the lower amount.

• Replacing the cost with the market value either directly or through a loss adjustment.

• Disclosing all relevant inventory information in the company’s financial statements.

If you’re seeking a professional inventory accountant, our team at Rakaez for Business—Certified Accountants and Auditors—is ready to help.

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In conclusion, Inventory Costing plays a critical role in the success of business management. It requires professionalism and accuracy to deliver precise outcomes.

That’s why it’s essential to consult a specialist when choosing the appropriate inventory costing method and following the correct procedures to ensure accurate and sound results.

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