Inventory Valuation Method

In this topic, we will look at the valuation methods used in perpetual inventory. We describe how each valuation method works.  Additionally, we look at using non-perpetual inventory and discuss the differences between using perpetual and non-perpetual inventory.

Summary: 

1. You have two choices for defining inventory valuation. perpetual inventory or non-perpetual inventory.

   A perpetual inventory system automatically controls both stock levels and stock value by creating automatic journal entries for accounts in the general ledger when items defined as inventory items are received or released from stock. 

   In a non-perpetual inventory system, sales, purchasing, inventory, and production transactions automatically create inventory transactions which affect only the inventory levels and have no effect on the stock value. However, it is possible to get an estimate of inventory value using different inventory reports.

2. Three methods are available for calculating Moving average, FIFO, and Standard Cost.

   1. Using the Moving Average method: Item cost equals total inventory divided by on-hand quantity.

   2. With FIFO, item cost is managed by layers.  Each receipt transaction creates a new layer. Each issuing transaction uses the first available open layer.

   3. The Standard Cost Method assumes a constant stock value. Item cost remains the same regardless of purchase price. Any difference between purchase price and standard cost posts to a variance account.

3. The inventory audit report is a useful way to view changes to inventory quantity and value in inventory accounts caused by inventory transactions. You can use this report to make comparisons between the accounting view (inventory balance accounts) and the logistics view (inventory value displayed by the audit report).

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