Inventory valuation

Chapter 5
• The correct pricing of issues and valuation of inventory are of the utmost
importance because they have a direct effect on the calculation of profit. Several
different methods can be used in practice.
• FIFO assumes that materials are issued out of inventory in the order in which they
were delivered into inventory: issues are priced at the cost of the earliest delivery
remaining in inventory.
• •LIFO assumes that materials are issued out of inventory in the reverse order to
which they were delivered: the most recent deliveries are issued before earlier
ones, and issues are priced accordingly.
• The cumulative weighted average pricing method (or AVCO) calculates a weighted
average price for all units in inventory. Issues are priced at this average cost, and
the balance of inventory remaining would have the same unit valuation.
• The average price is determined by dividing the total cost by the total number of
units.
• A new weighted average price is calculated whenever a new delivery of materials is
received into store. This is the key feature of cumulative weighted average pricing.
FIFO (first in, first out)
• FIFO assumes that materials are issued out of inventory in the order
in which they were delivered into inventory: issues are priced at the
cost of the earliest delivery remaining in inventory.
LIFO (last in, first out)
• LIFO assumes that materials are issued out of inventory in the reverse order to
which they were delivered: the most
• recent deliveries are issued before earlier ones, and issues are priced accordingly.
AVCO (cumulative weighted average pricing)
• The cumulative weighted average pricing method (or AVCO) calculates a weighted
average price for all units in inventory. Issues are priced at this average cost, and the
balance of inventory remaining would have the same unit valuation.
• The average price is determined by dividing the total cost by the total number of units.
Periodic weighted average
 5 Inventory valuation and profitability
Each method of inventory valuation (usually) produces different figures for both the value of closing inventories and
also the cost of material issues. Since materials costs affect the cost of production, and the cost of production works
through eventually into the cost of sales (which is also affected by the value of closing inventories), it follows that
different methods of inventory valuation will provide different profit figures.