As we know that inventories are an asset. Same principle is applied for valuation of inventory as apply for an asset. The cost incurred for bringing the inventory into working condition is the part of value of inventory.
These expenses that form the part of the value of inventory would be different for the three different types of inventory.
Raw Materials:
When the raw material is ready for using in production is called useable condition. Thus, all the expenses incurred before bringing the raw material to the actual production environment would have to form part of the value of raw materials.
It is impossible to find out the all expenses which will be part of value of raw material. Only certain expenses are possible to include in the value of raw material. Any expenses relating to storage and carriage from the stores to the production environment are thus ignored for valuing raw materials.
In case of the primary and secondary materials for the initial process as well as the secondary materials for the second and subsequent processes, the value would be dependent on the cost of purchase or acquisition which is given in almost all cases.
In case of the primary materials for the second and subsequent processes, the cost is ascertained as the cost of output of the process from which the input has been received.
Finished Goods:
Finished goods are those that are ready for sale or able to use. Thus, all the expenses incurred on the completion of production would have to form part of the value of finished goods. This is what we call the normal cost of normal output.
This value is obtained from the process cost data shown in the Process account. The "Normal Cost of Normal Output" per unit is what decides the value of finished goods.
Work in Progress:
Work in Progress is incomplete production. It may be complete to any extent depending on the case in consideration.
Trying to ascertain the value of work in progress based on the same principle would not be possible as the state of Usable condition for work in progress does not carry any meaning.
The value of work in progress includes all the expenses incurred on it. These are the expenses which ultimately go into the value of the final product.
Thus, to ascertain the value of work-in-progress we need to know the expenditure incurred on the same till that time when it is being valued.
This value is not straight away obtainable from the process cost data shown in the Process account. We need to make additional efforts to find the value of work-in-progress in processes.
Valuation of Closing Stock :
Once the value of current period inventory (raw materials and finished stock) is ascertained, it would be possible to ascertain the value of the respective closing stocks by choosing either the FIFO, LIFO or AVERAGE methods for valuation.
These expenses that form the part of the value of inventory would be different for the three different types of inventory.
Raw Materials:
When the raw material is ready for using in production is called useable condition. Thus, all the expenses incurred before bringing the raw material to the actual production environment would have to form part of the value of raw materials.
It is impossible to find out the all expenses which will be part of value of raw material. Only certain expenses are possible to include in the value of raw material. Any expenses relating to storage and carriage from the stores to the production environment are thus ignored for valuing raw materials.
In case of the primary and secondary materials for the initial process as well as the secondary materials for the second and subsequent processes, the value would be dependent on the cost of purchase or acquisition which is given in almost all cases.
In case of the primary materials for the second and subsequent processes, the cost is ascertained as the cost of output of the process from which the input has been received.
Finished Goods:
Finished goods are those that are ready for sale or able to use. Thus, all the expenses incurred on the completion of production would have to form part of the value of finished goods. This is what we call the normal cost of normal output.
This value is obtained from the process cost data shown in the Process account. The "Normal Cost of Normal Output" per unit is what decides the value of finished goods.
Work in Progress:
Work in Progress is incomplete production. It may be complete to any extent depending on the case in consideration.
Trying to ascertain the value of work in progress based on the same principle would not be possible as the state of Usable condition for work in progress does not carry any meaning.
The value of work in progress includes all the expenses incurred on it. These are the expenses which ultimately go into the value of the final product.
Thus, to ascertain the value of work-in-progress we need to know the expenditure incurred on the same till that time when it is being valued.
This value is not straight away obtainable from the process cost data shown in the Process account. We need to make additional efforts to find the value of work-in-progress in processes.
Valuation of Closing Stock :
Once the value of current period inventory (raw materials and finished stock) is ascertained, it would be possible to ascertain the value of the respective closing stocks by choosing either the FIFO, LIFO or AVERAGE methods for valuation.
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