Inventory Valuation

Types of inventory Current/non current

Mahindra relevant inventory

Frequent inventory write-offs can indicate a company's issues with selling its
finished goods or inventory obsolescence. This can also raise red flags with a
company's ability to stay competitive and manufacture products that appeal to
consumers going forward.

The weighted average method is used to assign the average cost of production to a
product. Weighted average costing is commonly used in situations where:

 Inventory items are so intermingled that it is impossible to assign a specific cost to an

individual unit.

 The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory
layers.

 Inventory items are so commoditized (i.e., identical to each other) that there is no way to
assign a cost to an individual unit.

When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases. You then use this weighted-average figure to assign a cost to both ending
inventory and the cost of goods sold.

 Impact on cost of goods sold. If you record a higher valuation in ending inventory, this
leaves less expense to be charged to the cost of goods sold, and vice versa. Thus, inventory
valuation has a major impact on reported profit levels.

The costs that can be included in an inventory valuation are:

 Direct labor
 Direct materials
 Factory overhead
 Freight
 Handling
 Import duties

It is also possible under the lower of cost or market rule that you may be required to
reduce the inventory valuation to the market value of the inventory, if it is lower than the
recorded cost of the inventory. There are also some very limited circumstances where you
are allowed under international financial reporting standards to record the cost of
inventory at its market value, irrespective of the cost to produce it (which is generally
limited to agricultural produce).