Inventory valuation is a critical accounting measure for all businesses. These metrics are used to calculate the value of unsold items at the end of each financial year. Choosing the right valuation and costing method can help you determine the monetary value of remaining inventory, evaluate cost of goods sold and eventually estimate profitability.
EZOfficeInventory offers two inventory valuation methods so you can choose the one that is best suited to your needs.
First in First Out (FIFO):
Items purchased first are the ones sold first. This means selling out the oldest inventory items first to keep the stock updated and show the flow of items.
Average Cost Method (AVCO):
While using this method, items are valued at an average cost price of all items purchased during that period. This method is great for companies that find it a challenge to assign individual cost prices to items.
Let’s see how you can apply these methods in EZOfficeInventory:
Step 1: Enable Valuation and Costing Methods for Items
Go to Company Settings → Valuation and Costing Methods for Items.
There are three costing methods available for inventory valuation:
Default Add Stock Price: The inventory stock will be added at the default price entered.
- First-in, First-Out: Asset Stock items are sold in order of purchase starting from the oldest.
- Average Cost Method (AVCO):
- The cost of goods sold will be calculated at the average value of all items. There are two options for this method:
- Add new stock at default price: the inventory/asset stock will be checked out at a default price.
- Add new stock at average cost per unit price: By using this option you will be able to add all new stocks at the current average price of Items. Please note that previous items before enabling this setting will not be affected
Note: Assets can be valued at either cost price or depreciated value.
Step 2: First in, First Out Calculation
You have purchased Asset Stock at the following price:
10 items @100 each at 01/01/2020
20 items @200 each at 03/05/2020
During the year 5 items were checked out, cost of goods sold using the FIFO method will be
Note: The first purchase i.e $100 will be used in FIFO method.
At the end of the year, the leftover Asset Stock will be calculated at:
(5 * $100)+ (20*$200)= $4500.
Step 3: Average Cost Value Calculation
You have purchased inventories at the following cost prices:
15 items @ $150 at 15/02/2020
35 items @$300 at 02/04/2020
60 items @$250 at 05/05/2020
During the year, there are 50 items checked out. The average cost will be calculated before costing checked out items.
The average cost will be calculated as :
(15 x $150) + (35 x $300) + (60 x $250) / (15 + 35 + 60) = $252.27
The cost of goods sold using the AVCO method will be
50*$6.36= $ 318
At the end of year, the remaining inventory items will be:
Step 4: View Cart Items
After you have enabled the Inventory Costing Methods from settings, you will be able to view the Asset Stock and Inventory as per their costing methods in Carts.
Note: Make sure you have enabled Tracking Costs of Carts from Settings → Add Ons.
Unit cost price gives you a detailed view of costs and users can also see total by adding Line Item Cost column. This view can be edited from the List View Preferences table.
Step 5: View Asset Stock/Inventory Details Page
If you have selected the Average Cost Method (AVCO), the following column will be generated in all Inventory and Asset Stock Detail pages.
Here you can also track Stock History from the Details page. Go to More → History → Stock History.
For Inventory, the Stock History displays Quantity, Cost Per Unit and Total Cost for consumed and new inventories.
For Asset Stock, the Stock History displays Quantity, Cost Per Unit and Total Cost for retire and checked out stocks.
Step 6: Run Valuation Reports
You can also run reports for Inventory Valuation and Costing Methods. Go to the Navigation Menu → Reports →Asset Stock/Inventory Reports →Asset Stock/Inventory Value.
You can also run Line Items Custom Report for costing methods. Go to Custom Reports → Inventory → Line Items. This report shows Cost Valuation method, Unit Cost Price and Total Cost for all sold, checked out and retired items.
EZOfficeInventory is a leading asset tracking software. It allows you to track, maintain, and report on inventory from anywhere, at any time. We offer a free 15-day trial – no credit card required!