Valuation of Inventories and Their Record

Written by True Tamplin, BSc, CEPF®

Updated on March 29, 2022

The cost of any materials used in a business is unproblematic from an accounting perspective if every item of similar materials is purchased at the same price. In actual practice, however, market conditions are unstable and prices fluctuate.

Thus, the store ledger cards for a given item of material are likely to show different prices for the same materials purchased at different times. Hence, the question arises: What price should the company charge for the materials issued?

Suppose Item A is purchased in two batches:

Batch 1: Purchased at $5.00 per unit

Batch 2: Purchased at $6.00 per unit

When this material is issued to a production department, the question arises as to whether it should be charged at the rate of $5.00, $6.00, or $5.50 per unit.

Noteworthily, all of these options are viable. However, what is critical is that, before issuing materials to the production department, a costing policy must be devised. In turn, it must be consistently applied.

Methods of Material Costing

Different policies and methods of costing materials are used are as follows:

  • First in, first out (FIFO)
  • Last in, first out (LIFO)
  • Weighted average method (or moving average method)

Valuation of Inventories and Their Record FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.