Inventory Valuation Methods

Guide: Nisha shankar

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 Group member
• Sumit
• Sneha
• Ankur
• Atishay
• Rishi

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 Meaning

• Inventory Control is the supervision of supply,

storage and accessibility of items in order to
ensure an adequate supply without excessive
oversupply.

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 Inventories refers to:

• Finished goods inventory

• Work in process inventory

• Raw materials , stores and supplies

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Why is inventory control
important?

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HIFO NIFO

WAM BSM

Mkt. price
method
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 Highest in first out (hifo)
• In accounting, an inventory distribution method in
which the inventory with the highest cost of
purchase is the first to be used or taken out of stock.

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 Advantages of hifo method
• Companies would likely choose the HIFO inventory
method if they wanted to smooth financial
performance.

• Very suitable when the market is constantly

fluctuating.

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 Disadvantages of hifo method
• Costliest materials are issued first.

• Not being adopted widely.

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 Next in first out(nifo)
• The method attempts to value materials issues or
goods sold at an actual price which is as near as
possible to the market price.

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 Advantages of nifo method
• The measurement of production cost for internal use
and cost of goods sold for external use is more
accurate.

• Its only advantage is that stock valuation is made

at the up-to date replacement cost.

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 Disadvantages of nifo method
• This method is not considered a generally accepted
accounting principle (GAAP).

• This typically lowers the profit margin.

• During inflationary times using this method allows a

company to price goods ahead of rising producer prices.

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 Weight avg. method
• This method is based on the presumption that once
the materials are put into a common bin, they lose
their separate identity.

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 Advantages of weighted avg. method
• The method is logical and consistent

• Do not much affect the materials issues and stock

• The method follows the concept of total stock and

total valuation

• Both cost of materials issued and in stock tend to

reflect actual costs.

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Disadvantages of weighted avg. method

• Less convenience when there is too much change in

the price of material.

• An avg. price is not based on actual incurred, i.e. is

not realistic

• It follows only arithmetical convenience

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 Base stock method
• Under this method pricing is determined on the basis
of assumption made here is that a certain minimum
quantity of materials maintained in stock. This
minimum quantity is known as Base Stock or Safety
Stock. This quantity cannot be used unless an
emergency arises.

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 Advantages of base stock method
• No unrealized profit/ loss arises from the operation
of this method as materials are issued at actual cost.

• This method is also useful when transactions are

fairly steady.

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 Disadvantages of base stock method

• The disadvantages of this method is that the

stock may be under valued and hence the
computation of return on capital will not be
reliable.

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 Market price method
• Under this method materials issues are priced at
replacement price on the date the issue is made.

• The market price is the cost of securing the same

type of material at the current moment in time.

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Advantages of mkt. price method
• It discloses good or bad buying made by the
purchase department of the firm.

• The mkt. price method helps in determining a

selling price for the product.

• Brings out the difference between holding gains

and operating gains.

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 Disadvantages of mkt. price method
• This is not based on actual cost, i.e., cost incurred,
and therefore may add confusion.

• This method is workable only when market prices are

available.

• The objectivity is lost in accepting the replacement

cost as the basis of material pricing.

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