3 popular methods of calculating inventory prices today
Calculating inventory prices plays an important role in helping businesses determine revenue goals, save taxes and have stable financial resources. By determining the appropriate inventory costing method , businesses can better manage inventory and forecast profits. In the article below, let's learn with 1C Vietnam about 3 popular methods of calculating inventory value today.
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1. Method of calculating inventory prices according to specific prices
The specific inventory valuation method is applied based on the actual value of each purchased item or manufactured product.
Based on this method, the value of products, supplies or goods released from warehouse will depend on the specific batch of imported goods and the business will use the unit price of that batch of goods to calculate.
- Advantages : This method is considered optimal, complies with accounting principles and ensures the reality of costs in accordance with revenue. Recording the value of inventory based on this method corresponds to the actual revenue it brings (Inventory value accurately reflects their actual value).
- Disadvantages : Applying this method requires strict conditions and is only suitable for businesses with a small number of items, high-value inventory, stable and identifiable items. . For businesses with many types of goods, this method cannot be applied effectively.
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2. Calculate inventory value according to the FIFO method
First in, first out (FIFO) method is a method of calculating inventory value based on the assumption that inventory purchased or produced first will be issued first and the inventory price The end of the period will reflect the value of inventories approaching the end of the period.
According to this method, the value of warehoused goods is calculated based on the price of the warehoused goods at the beginning of the period or near the beginning of the period. The value of ending inventory is calculated based on the price of inventory at or near the end of the period.
This method is suitable for businesses that sell products with stable or decreasing prices, often applied in fields such as medicine, cosmetics...
- Advantages : Calculating the capital value of warehoused goods is done immediately after each shipment, thereby ensuring timely provision of information for the subsequent accounting and management recording process. The capital value of the inventory will be close to the current market price of that product. From there, inventory indicators presented on accounting reports will reflect reality more accurately.
- Disadvantages : Current revenue does not match current expenses, creating an imbalance. This method is based on current revenue reflecting the value of products, materials and goods accumulated over a long period of time. At the same time, when there are many types of goods with continuous import and export processes, this method can easily lead to increased costs related to accounting and workload.
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3. Weighted average method of calculating inventory prices
According to this approach, the value of each type of inventory is calculated based on the average value of each type of inventory at the beginning of the period and the value of each type of inventory purchased or produced during the corresponding period. This method of calculating the average value can be done each period or after each new import, depending on the specific conditions of each business.
3.1 Calculate the inventory price according to the weighted average price at the end of the period (average price for the entire inventory period)
This method is suitable for businesses with few sales points but a large number of imports and exports. Enterprises will base on the actual price of inventory at the beginning of the period to determine the average price of a unit of product or goods.
According to this approach, at the end of the period, the capital value of goods delivered during the period is calculated. Depending on the enterprise's reserve period, inventory accounting will be based on the import price, inventory at the beginning of the period and imports during the period to calculate the average unit price.
- Advantages : Simple and easy to perform calculations once at the end of the period.
- Disadvantages : The level of accuracy is not high and calculations concentrated at the end of the period can affect the progress of other tasks. In addition, this method does not satisfy the requirement of providing timely accounting information as soon as a transaction occurs.
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3.2 Calculate inventory price according to weighted average price after each entry (average of time, instantaneous)
After each import of products, supplies, and goods, the accounting department must re-determine the actual value of inventory and calculate the average unit price. The formula to calculate the average unit price is as follows:
- Advantages : This method overcomes the disadvantages of the above method, ensuring accuracy and continuous updates.
- Disadvantages : This method requires a lot of effort and calculations must be repeated many times. Therefore, it is often applied in businesses with few types of inventory and low import and export traffic.
Thus, each inventory valuation method comes with its own advantages and disadvantages. The level of accuracy and reliability of each method will depend on the management requirements, professional qualifications and equipment of the enterprise with calculation tools and information processing facilities. Don't forget to follow other articles on 1C Vietnam's website to update other useful information!
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