1

United International University

Assignment on
Inventory valuation practices by Ceramics companies
of BANGLADESH
Course Title: Financial Accounting I
Course Code: ACN 1205

Submitted To:
Rana Mazumder
Lecturer-AIS
BBA, School of Business and Economies

Submitted By:
Nahid Hasan Tushar
Sec: NG
ID: 111 162 138

Submitted Date: 9 September, 2017

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Contents
1. Introduction......................................................................................................................................3
2. Inventory Valuation..........................................................................................................................4
3. Types of Inventory Valuation Techniques........................................................................................5
4. Criteria for Selecting the Appropriate Inventory Costing Method...................................................6
5. Overview of Ceramic Companies of Bangladesh..............................................................................7
6. Inventory Costing Practices by Ceramic Companies of Bangladesh.................................................8
6.1 Fu-Wang ceramics.......................................................................................................................9
6.2 Monno ceramics..........................................................................................................................9
6.3 Standard ceramics.......................................................................................................................9
6.4 Shinepukur ceramics..................................................................................................................10
6.5 RAK ceramics.............................................................................................................................10
7. Recommendation............................................................................................................................11
8. Conclusion.......................................................................................................................................11
9. References.......................................................................................................................................11
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Inventory Valuation Practices by Ceramics Companies in

Bangladesh

1. Introduction

Inventory valuation methods has significant impact on financial statement of the

organization. Without accurate inventory valuation methods can cause either understated
or overstate net profit for the company and also impact on the amount of tax payment by
the organization (Askew, 2012).Inventory valuation allows companies to provide a monetary
value for items that make up their inventory (stock). Inventories are usually the largest
current asset of a business and are as important as funds (cash). It is a form of fund tied up
in assets (current assets). It's proper or accurate measurement or valuation cannot be
overlooked as it forms a greater percentage of an enterprise's current assets in particular
and a total asset in general (Fink, 2008). Level of inventories differ from industry to industry.
Holding inventory significantly affected by nature of production process, product attributes,
market demands, raw material used in the production process. For manufacturing
companies, inventories usually represent approximately 20 to 60 percent (%) of their assets
(Morgan, 2007). If inventory is not properly valued, it may result that expenses and revenue
not be properly matched and a company could make poor business decisions that will affect
the company's profit. Inventory in manufacturing company or concern comprises of the
following components: Raw materials inventory, Work-in-progress (semi-finished goods)
inventory and finished goods inventory (Muthupandian, 2008). However, selection of
inventory valuation technique is momentous for the organization due todifferent techniques
or methods in the valuation of inventories produce different values of inventory. Inventory
valuation method used by an enterprise is determined by a number of reasons, these
include inflation, differences in quantity discounts, frequent changes in prices of commodity,
buying from different suppliers and also the nature of items or product and to some extent
selection be influenced by the management policy of the organization as well (Barth, 2008).
Manufacturing companies have a high level of raw material inventory and semi-finished
goods inventory as it is found in the grocery stores. Considering the large sums of money
tied up in inventory, it is pertinent to have an "information model" as a result of the obvious
fact that if stock matters (receipts, issues and controls) are not properly handled, it would go
a long way to jeopardize the financial status (liquidity) as well as the profitability position of
the firm (Morgan, 2007).
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2. Inventory Valuation

The basis of accounting for inventories is cost. This straightforward concept is frequently
complicated by the entity's inability to match actual cost flow with specific physical units. US
GAAP allows many ways (e.g., retail method) to measure the cost of inventory. The three
basic and most popular methods are:
1) first-in, first-out (FIFO),
2) last-in, first-out (LIFO),
and 3) weighted average.
Once the cost is measured, then the LCM rule is applied to the result to determine the
monetary amount to be reported in the financial statements (AICPA, 2012). The LCM rule
represents an application of the concept of conservatism which has been one of the
dominant approaches used in forming and applying accounting rules under US GAAP
(Haverals, 2010). It is a practical attitude that attempts to avoid overstating assets and net
income in the event of uncertainty. Conservatism is not an accounting principle but
Conservatism, as used by many practicing accountants, is to record anticipated losses now
and defer gains until realized. It compares inventory cost (i.e., value) as recorded on the
financial books regardless of the method (e.g., LIFO, FIFO) used with market value. The term
"market, for this purpose, is defined as current replacement cost not to exceed a ceiling of
net realizable value (selling price less costs of completion and disposal) or be less than a
floor of net realizable value less a normal profit margin" (Doupnik, 2012). The LCM acts as a
conservatively approached "safety valve" by recording anticipated losses currently and
deferring gains until realized. IFRS inventory rules are less conservative than US GAAP
inventory rules. Four significant differences separate US GAAP from IFRS. First, IFRS allows
the use of the FIFO and weighted average methods, but LIFO is not permitted. Second, IFRS
applies the lower of cost or net realizable value. Third, the historical inventory "cost" is used
in applying the lower of cost or net realizable value over the entire period that the inventory
is held. Fourth, write-downs are reversed as selling prices rise. Over the life of an entity, US
GAAP and IFRS result in the same amount of expense (and profit) reaching the income
statement (SEC, 2010). However, the inventory and cost of goods sold balances in any given
period can differ dramatically. LIFO, as used in the US, is largely driven by a rather complex
set of income tax rules as developed for the US and published as part of the US Internal
Revenue Code (Jr, 2014). As of the year 2013, there is no international LIFO conformity rule
(Wahlenet.al., 2013) Although there are lots of methods of inventory valuation, enterprises
are restricted to some degree in the choice of pricing method in terms of inventory ex-
factory, no matter in which country's accounting system or the IAS - 2. Inventory
management policies of an enterprise need to be specified according to the enterprise's
own characteristics. Pricing method in issuing inventory is closely related to the enterprise
inventory management, so it's quite necessary to choose a method that corresponds to the
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characteristics of inventories in an enterprise (Lan, 2011). The majority of enterprises, using

FIFO method and weighted average method by considering the characteristics of inventory
itself can simplify the pricing procedure and reduce the enterprise cost to some degree
(Augustine & Agu, 2013) Compared with other methods, the FIFO method is closer to the
actual flow of products for most enterprises. Therefore, the FIFO method is more suitable
for the actual flow of inventory, which benefits the management of the inventory in the
enterprises and makes the inventory balance closer to the market value. But the actual
usage of the FIFO method is much less frequent than that of the Weighted Average method.

3. Types of Inventory Valuation Techniques

Johnson (1954) defines inventories as products, partially completed products, raw materials
and supplies - all of which await the ultimate fruition of sales transactions. Gupta (2005,
p.315) provides a more thorough definition of inventories as: “assets (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c) in the form
of materials or supplies to be consumed in the production process or in the rendering of
services.” According to Needles and Powers (2012), the value assigned to inventories is the
result of two measurements: quantity and cost. In accordance, Narayanaswamy (2011,
p.266) states: “The first step in proper inventory valuation is to determine the physical
inventory that belongs to the business.” A firm may therefore count inventories either on a
periodic basis or track inventories based on purchases and sales in order to determine the
quantity. Once the quantity is determined, inventories are then transformed into financial
amounts by assigning costs to the physical quantities (Stickney et al., 2010). Bhattacharyya
(2012, p.376) refers to cost of inventories as: “all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.” The
cost of inventories is commonly computed by using the following four cost formulas:
1. Specific Identification
2. First-In-First-Out (FIFO)
3. Last-In-First-Out (LIFO)
4. Average-Cost/Weighted Average-Cost
Specific identification method is a common practice for firms with unique, high-value items
as inventories like automobiles, paintings, expensive jewelry and custom-made furniture
(Anthony et al., 2003). Weygandt et al. (2009) state that cost for such inventories is
calculated by clearly identifying each individual inventory items and tracking its movement
in and out of stock. However, specific identification becomes impractical if items in
inventory are interchangeable. In such cases, firms generally assume the items sold and
items remaining in inventory by using the cost flow methods of FIFO, LIFO or Average-Cost
(Stickney et al., 2010).According to Rao (2011), FIFO method is generally consistent with the
physical flow of inventories in most of the enterprises. It is based on the assumption that
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the earliest purchases are sold first and the more recent purchases remain in ending
inventory (Rich et al., 2012). This implies that FIFO method values ending inventory at the
current costs. Stickney et al. (2010) claims that this chronological cost flow of FIFO method
conforms to good business practice - particularly for items that deteriorate or become
obsolete. LIFO method, in contrast, does not coincide to the actual physical flow of
inventory (Khan and Jain, 2010). LIFO method assumes that the more recent purchases are
the first to be sold and hence, ending inventory is based on the costs of the earliest
purchases (Weygandt et al., 2009). Narayanaswamy (2011) claims that this method of
valuation can result in realistic reported profits since current costs is matched to current
revenues. However, Needles et al. (2011) argue that the value of inventories at earliest
prices can present an unrealistic picture of the inventory’s current value under LIFO method.
An alternative to the FIFO and LIFO method is the weighted-average cost method. Khan and
Jain (2010) states that the average-cost system is appropriate where the inventory consists
of units which are homogenous, interchangeable and does not follow any specific pattern of
physical flow. Under this method, the value assigned to inventory is the average cost of all
inventory items available for sale during the period (Needles and Powers, 2012). Due to the
technique of assigning average cost, Bhattacharyya (2012) claims that this method
smoothens the fluctuations in the cost of inventory items. In brief, “no one cost method is
conceptually superior to any other” (Rich et al., 2012, p.312) for the valuation of inventories.
Needles et al. (2011, p.292) state that: “the choice of method depends on the nature of the
business, the financial effects and the cost of implementation.” Companies, therefore, tend
to choose a method which is unique to their own situation. Weygandt et al. (2009) further
suggests that the reason companies adopt different costing methods may vary, but they
usually involve three factors – such as the effect of each method on income statement,
balance sheet and income tax. This implies that inventory valuation methods can have
major effects on the financial statements – a reason why many studies have been conducted
regarding the choice, effects of the choice and rationale behind the choice of these costing
methods.

4. Criteria for Selecting the Appropriate Inventory Costing

Method

Past studies related to inventory costing methods have been conducted in two directions.
First, there is an impressive body of evidence documenting reasons as to which inventory
costing method can be an optimal choice. Most of these studies focused on companies
which adopted the inventory costing methods of FIFO and LIFO across United States and
Europe (Ibarra, 2008). Sunder (1976) presented a deterministic model to estimate the
difference between the net present value of tax payments and cash flows associated with
FIFO and LIFO. Based on these differences, the author claimed that companies may choose
the best alternative to value their inventories. Hughes and Schwartz (1988) also developed a
predictive model to focus on a manager’s choice of inventory costing methods in a world of
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asymmetric information and found tax benefits as a strong rationale behind the choice. In a
similar view, the model developed by Cushing and LeClere (1992) considered additional
factors like firm size, inventory variability, etc to predict the choice of inventory costing
method. The authors concluded that both tax and non-tax considerations influenced the
choice and that a predictive model for inventory costing method was still elusive. Another
such deterministic framework was presented by Bar-Yosef and Sen (1992), wherein,
incentive effects and tax gains were taken into consideration. Authors identified “an optimal
inventory accounting policy that calls for a mixed strategy” (Bar-Yosef and Sen, 1992, p.335)
– that is, partly FIFO and partly LIFO – and claimed the weighted average method to be the
optimal choice. Conversely, some notable studies examined the reasons behind the choice
of inventory costing methods and the effects accruing from these diverse practices. Many
researchers (Morse and Richardson, 1983; Hunt III, 1985; Lee and Hsieh, 1985; Dopuch and
Pincus, 1988; Kuo, 1993) concluded from their empirical analysis that tax benefits, firm size
and high debt levels plays a deterministic role behind the choice of the inventory costing
method. Morse and Richardson (1983) particularly claimed that firms of similar size and in
the same industry tend to choose the same inventory costing method. Other studies like
Dopuch and Pincus (1988), who compared FIFO and LIFO methods based on their effects in
the financial statements, concluded that the choice of LIFO method was more related to tax
savings. This study, however, does not aim to develop any predictive model or discuss the
reasons behind the choice of inventory costing methods and their effects on the financial
statements. Rather, the objective is to identify the inventory costing method commonly
used by companies in Bangladesh and to determine whether the selected method is
consistently applied within the bounds of accounting standards. Representative studies, in
line with the objective of this paper, include Herrmann and Thomas (1995) – where authors
claimed FIFO to be more in use across Denmark, Ireland, Netherlands and UK while Average-
Cost method was found popular in France and Portugal. A predominant use of the LIFO
method was also noted by this study in Germany, despite there being reservations about
LIFO in the accounting standards. Another study by Chung and Narasimhan (2003) stated a
general use of the LIFO method by multinational companies in United States. A similar study
was conducted by Jaafar and McLeay (2007) which confirmed the existence of LIFO in
Germany. Authors also revealed the use of Average-Cost method across France and Spain
and FIFO method in Sweden, Italy and UK. One study which particularly relates to this
research have been reported by Ali et al. (2006), where a consistent use of the Average-Cost
method was found in Pakistan and Bangladesh. To date, there has been no independent
study conducted on the inventory costing methods commonly used by companies in
Bangladesh. Consequently, the primary focus of this study is to establish the prevailing
method of inventory valuation, assess the consistency and harmonization of the common
practices across companies in Bangladesh through the methodology of documentary
research.
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5. Overview of Ceramic Companies of Bangladesh

The ceramics industry is a growing manufacturing sector in Bangladesh. The industry started
during the late 1950s when the first ceramic industrial plants were established. The industry
mainly produces tableware, sanitary ware and tiles. As of 2011, there were 54 ceramic
industrial units throughout Bangladesh, employing about 500,000 people. In the first nine
months of the fiscal year 2013- 14, Bangladesh exported about USD 36 million worth of
goods after meeting 80% of the domestic demand. The main export destinations are the EU,
USA and the Middle-East. The first ceramic plant was established in Bogra in 1958. Owned
by Tajma Ceramic Industries, it was a small manufacturing plant for porcelain tableware.
Peoples Ceramic Industries, formerly Pakistan Ceramic Industries, started production in
1966. Bengal Fine Ceramics Ltd, the first Bangladeshi stoneware manufacturer, began its
operations in 1986. One of the largest ceramic manufacturers in Bangladesh, Monno
Ceramics, was established in 1985 to produce porcelain tableware with other ceramic items
later. Shinepukur Ceramics was established in 1997 for the production of bone china and
porcelain tableware. Shinepukur later captured around 60% of the domestic market. Some
white clay deposits have been discovered in Mymensingh, Sylhet and Netrokona. The largest
deposit of white clay is situated at Bijoypur of Mymensingh which was discovered in 1957.
However,
ceramic manufacturers import almost all of their raw material. China, India, New Zealand
and Germany are the main sources of the raw materials. Ceramic products have been
exported to more than 45 countries. The largest export destinations are the United States,
Italy, Spain, France, New Zealand, the Netherlands, Australia and Sweden. China and
Thailand are amongst the major competitors in the international market for Bangladeshi
ceramic manufacturers. However, the low labor costs of the local manufacturers have put
Bangladesh in a strong position. The initial step in ceramic tile involves mixing the
ingredients. If wet mill is used, the excess water is removed using filter pressing followed by
spray drying. The resulting powder is then pressed into the desired tile body shape. Once
the raw materials are processed, a number of steps take place to obtain the finished
product. These steps include batching, mixing and grinding, spray-drying, forming, drying,
glazing, and firing. Many of these steps are now accomplished using automated equipment.

6. Inventory Costing Practices by Ceramic Companies of

Bangladesh
CERAMIC industry of Bangladesh is a booming sector and the growth potential of both
domestic and foreign market indicates it may become one of the big foreign currency earners
for the country. Bangladesh have 5 ceramic companies and almost all of them use Weighted
Average method for inventory costing practices over the years. Inventory costing practices
refers to the inventory turnover ratio which all of the ceramic companies have. The inventory
turnover ratio is one of the most important financial ratios. Of all the asset management
ratios, it gives the business owner some of the most important financial information. The
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inventory turnover ratio measures the efficiency of the business in managing and selling its
inventory. This ratio gauges the liquidity of the firm's inventory. It also helps the business
owner determine how they can increase their sales through inventory control. Generally, a
high inventory ratio means that the company is efficiently managing and selling its inventory.
The faster the inventory sells the fewer funds the company has tied up. Companies have to be
careful if they have a high inventory turnover as they are subject to stock outs. If a company
has a low inventory turnover ratio, then there is a risk they are holding obsolete inventory
which is difficult to sell. This may eat in to a company's profit. However, the company may
be holding a lot of inventory for legitimate reasons. They may be preparing for a holiday
season in the case of the retail industry or preparing for a strike, among other reasons. Here is
the some brief detail about their inventory turnover ratio:

6.1 Fu-Wang ceramics

FU-WANG Ceramic Industry Ltd. incorporated in Bangladesh from 31 March, 1995. Around
500 employees are working in this industry. It has started its unit 1 production from October
1996 and unit 2 production from October 2000. Fu-Wang Ceramic gained the users trust
because of the high quality & standard and as a result it achieved ISO-9002 Certificate on 04
November 1998.The ratio value from 2004 to 2013 is accordingly 2.39, 1.98, 2.13, 2.00,
1.22, 1.34, 1.65, 2.13, 2.76 and 2.09. The ratio value indicates there is a high variability. In
2008 the ratio value is lowest that is 1.22 and in 2012 the ratio value is highest that is 2.76.
(As Shown in Table)

6.2 Monno ceramics

Monno Ceramic Industry also knows as “Monno” started its journey in Bangladesh in 1985.
It is producing porcelain tableware for the Bangladesh home market since 1985. Its
dinnerware is very popular in Bangladesh. Porcelain is a ceramic material made by heating
raw materials, generally including clay in the form of kaolin. Monno Ceramic Industry began
producing porcelain for the first time in Bangladesh in 1985. In each product of Monno
Ceramic there is a seal “Made in Bangladesh” which proves that this industry is proud to
contribute to the growth of the Bangladesh economy. The ratio value from 2005 to 2013 is
accordingly 3.00, 2.11, 1.80, 2.67, 1.93, 1.96, 1.89, 2.20, and 2.04. The ratio value from 2005
to 2013 indicates there is a high variability. In 2005 the ratio value is height that is 3.00 and
in 2007 the ratio value is lowest that is1.80. (As Shown in Table)

6.3 Standard ceramics

Standard Ceramic Industries Limited also known as (SCI) in its short form started its
commercial production as a public limited company in Bangladesh from September 1st.
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1993. This industry was designed by world famous Japanese ceramist named Mr. Kyoki
Yamazaki, who was working at Sone Ceramic at that time. SCI authorized capital is 100
million as on 19-07-2012..The ratio value from 2003 to 2013 is accordingly 2.25, 1.66, 1.63,
2.11, 2.37, 1.27, 0.96, 1.50, 2.22, 2.72, and 3.94. The ratio value from 2003 to 2013 indicates
there is a high variability. In 2009 the ratio is 0.96 is lowest and 2013 the ratio value 3.94 is
highest. (As Shown in Table)

6.4 Shinepukur ceramics

Shinepukur Ceramics Limited also known as (SCL) in its short form is a member of Beximco
group. Beximco group is one of the largest organization in Bangladesh run by famous
businessman Salman F. Rahman. At this stage, this group has over 4000 employees. Like
Shinepukur Ceramics Limited, Beximco group is expanding its business in Textiles, Trading,
Marine Food, Real Estate Development, Hospitality, Construction, Information and
Communication Technologies, Media, Ceramics, Aviation, Pharmaceuticals, Financial
Services and almost with every important sectors. The ratio value from 2003 to 2012 is
accordingly 0.93, 0.0009, 1.11, 1.11, 1.09, 1.20, 1.32, 1.49, 1.39 and 1.50. The ratio value
indicates from 2003 to 2005 there is a high variability then from 2005 to 2012 there is a low
variability over the year. In 2004 the ratio value 0.0009 is lowest and in 2012 the ratio value
1.50 is highest. (As Shown in Table)

6.5 RAK ceramics

RAK Ceramic (Bangladesh) Limited is a joint venture with UAE-Bangladesh company. RAK has started
its commercial production on 12 November, 2000. From the very beginning it is concerned to
produce high quality products (ceramics tiles, bathroom sets and all types of sanitary goods) towards
the honorable clients and it is successfully maintaining the quality. As a result, RAK achieved ISO
9001:2008 certificate which is considered one of the glorious certificate for multinational
organizations. The ratio value from 2008 to 2012 is accordingly 2.30, 2.11, 1.68, 1.62, and 1.67. The
ratio value indicates there is a low variability. In 2008 the ratio value 2.30 is highest and in 2011 the
ratio value 1.62 is lowest. (As Shown in Table)

Table 1

INVENTORY TURNOVER RATIO

  FU-WANG MONNO STANDARD SHINEPUKUR RAK
200
3     2.253740092 0.933912097  
200
4 2.391180074   1.661444123 0.000954179  
200
5 1.985916216 3.007848553 1.638321608 1.11365  
200 2.131054927 2.111829777 2.112301569 1.114674277  
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6
200
7 2.007638248 1.809476787 2.373471951 1.099857238  
200
8 1.223203279 2.670984246 1.270921436 1.205140589 2.30468
200
9 1.342860053 1.932607433 0.966831789 1.3235632 2.110958104
201
0 1.656176547 1.960164439 1.505907621 1.499829806 1.683823321
201
1 2.132158267 1.893451759 2.225870079 1.399641452 1.624544417
201
2 2.765858923 2.201305384 2.722578413 1.500856611 1.675672981
201
3 2.090528525 2.049538921 3.941139875    
[Note: data inaccessibility and information gap]

7. Recommendation

There is no one single method of valuing inventory which is accepted as accurate. There is
freedom by individual firm to adopt any suitable method of its choice. Moreover, whichever
method a firm chooses is dependent on the superiority of that particular method to other
valuation methods. Furthermore, for the firms in the industry to adopt a particular method
which suits their peculiarity and conformity with available standard and regulations, such
chosen method must certainly be superior to any other. But it is more likely to say if they try
to use different method other than weighted average method it will more accurate for all of
them.

8. Conclusion
The overall results of this study demonstrate that the Weighted Average-Cost method is
particularly practiced across all nonfinancial sectors in Bangladesh. The most plausible
explanation behind this choice is that the averaging technique of this method makes
valuation of inventories convenient during times of volatile price changes (Khan and Jain,
2010). However, this study does not claim that the Weighted Average-Cost method is an
optimal choice for inventory valuation in Bangladesh. The present study also reports the use
of alternative inventory costing methods across various sectors, which can be justified on
the basis of different business circumstances (Archer et al., 1996). Yet, a noteworthy
difference is observed where in some firms adopted different valuation techniques despite
being from similar industries. Such cases of discord imply that harmonization of accounting
practices are not being completely ensured in Bangladesh. Institute of Chartered
Accountants in Bangladesh (ICAB) and government agencies like Security and Exchange
 12

Commission (SEC) therefore needs to establish new rules in order to standardize the use of
inventory costing methods within similar sectors of Bangladesh.

9. References
 https://www.academia.edu/9258966/Comparative_Performance_Analysis_between
_Ceramics
 http://www.ijirr.com/inventory-valuation-practices-developing-country-perspective
 https://www.researchgate.net/publication/313618209_INVENTORY_VALUATION_A
ND_IAS-2_COMPLIANCE_in_Bangladeshi_Manufacturing_Industries
 http://www.idlc.com/public/documents/mbr/15/Monthly%20Business%20Review
%20-%20January%202015.pdf
 www.google.com
 www.wikipedia.com