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Inventory Pricing and Valuation

The term inventory generally refers to stock or stock in trade. Inventory includes (i) stock of finished goods (ii) work in progress (iii) raw materials and components. In a trading organisation inventory refers to goods meant for resale or unsold stock. In case of manufacturing organisation, inventory consists of raw materials, semi-finished goods, finished goods and stores.

The Institute of Chartered Accountants of India CICAI) defines in accounting standard number 2. Inventories as tangible properties held.

(i)                 Enable to make a sale in the ordinary course of the business.

(ii)               In the process of production for such sale

(iii)             To be consumed in the production of goods or services for sale including maintenance supplies and consumables other than machinery spares.

Inventory valuation is more essential for the organisation, in order to assess the operating performance and financial position of the company. Normally, inventory valuation is done at the end of the financial year.

OBJECTIVES OF INVENTORY VALUATION 

(i) The ultimate object of the inventory valuation is the determination of the true profit earned by the organisation during a particular accounting period.

(ii) To determine the correct financial position of the concern because inventory is shown as the current asset in the Balance sheet. Suppose, it could not be properly valued means it is difficult to determine the correct financial position. 

BASES OF INVENTORY VALUATION 

(i)                 Historical Cost. Under the historical cost, cost accounting provides a certain rule that the inventory should be valued at cost.

(ii)               Either the Cost or Market Price : Whichever is lower. Under this method, the inventory is valued at cost or market price whichever is lower.

(iii)             Net Realizable Method. Net realizable value represents the estimated selling price less cost of the completion. But under this method, the stock is valued at historical cost as the selling price will be lower to a certain extent.

(iv)             Replacement Cost Method. Under this method inventories are valued at a replacement value. It may be taken as either the market value or reproduction value.