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)

Frequently Asked Questions

What is inventory?

Inventory refers to the goods and materials that a company has on hand. inventory can include raw materials, finished products, components, packaging, supplies, and anything else used in the production process.

What is the purpose of inventory valuation?

The primary purpose of inventory valuation is to provide an accurate representation of a company's financial position. This information is used by investors and creditors to make decisions about whether or not to invest in or lend to a company.

How do businesses value inventory?

There are several methods businesses can use to value their inventory, including last in first out (LIFO), first in first out (FIFO), and weighted average cost. The most appropriate method will depend on the type of inventory and the industry in which the company operates.

What are the benefits of accurate inventory valuation?

Accurate inventory valuation can provide a number of benefits for businesses, including: -A more accurate representation of financial position -Improved decision making -Reduced costs -Better cash flow management -Increased competitiveness

How often should businesses revalue their inventory?

The frequency with which a business should revalue its inventory will vary depending on the type of inventory and the industry in which it operates. However, most businesses should reevaluate their inventory at least once a year.

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.