{"id":684,"date":"2023-06-16T22:40:28","date_gmt":"2023-06-16T22:40:28","guid":{"rendered":"https:\/\/mudabicara.com\/en\/?p=684"},"modified":"2023-06-16T22:40:28","modified_gmt":"2023-06-16T22:40:28","slug":"what-is-inventory-valuation-method-definition-and-types","status":"publish","type":"post","link":"https:\/\/mudabicara.com\/en\/what-is-inventory-valuation-method-definition-and-types\/","title":{"rendered":"What is Inventory Valuation Method? Definition and types"},"content":{"rendered":"<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">One way to calculate the total value of inventory owned by a company in a certain period is to use the inventory valuation method.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">The calculation of inventory value is based on the total costs incurred to purchase inventory and prepare it for sale in the market.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">The choice of this method is very important in accounting where the valuation of each item plays a role in calculating\u00a0 <\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Cost of Goods Sold<\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\"> .<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Using an appropriate inventory valuation method will also have a direct impact on the data in the income statement and balance sheet.<\/span><\/span><\/p>\n<pre><span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" href=\"https:\/\/mudabicara.com\/en\/what-is-a-balance-sheet-definition-and-examples\/\">Read Also : what is a Balance Sheet Definition and Examples<\/a><\/strong><\/span><\/pre>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Therefore, this article will explain what are the various methods of inventory valuation along with their differences and examples.<\/span><\/span><\/p>\n<h2><span id=\"Apa_Itu_Penilaian_Persediaan\"><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">What is Inventory Valuation?<\/span><\/span><\/span><\/h2>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">What is meant by inventory valuation is an accounting practice used by a company to find out the value of unsold inventory.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">This inventory value will be recorded when the company prepares its financial statements.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">As you know, inventory is an important asset for an organization, and companies are no exception.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">And if the company wants to record it on the balance sheet, then the inventory needs to have financial or financial value.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">This value can help you in determining the inventory turnover ratio.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Not only that, inventory values \u200b\u200bwill also make it easier for you to plan your purchasing decisions.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">For example, if you run a shoe business and you only have 25 pairs of shoes at the end of the period, you need to calculate the financial value.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">You must record this value on your balance sheet. <\/span><span style=\"vertical-align: inherit;\">So, to calculate the value of inventory, there are several methods that you can use.<\/span><\/span><\/p>\n<pre><span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" href=\"https:\/\/mudabicara.com\/en\/what-is-business-analysis-definition-and-practice\/\">Read Also : What is Business Analysis? Definition and Practice<\/a><\/strong><\/span><\/pre>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">For a further explanation of the types of methods and reasons why calculating inventory values \u200b\u200bis important, don&#8217;t stop here.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Keep watching the discussion below until the end!<\/span><\/span><\/p>\n<h2><span id=\"Alasan_Pentingnya_Mengetahui_Penilaian_Persediaan\"><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Why It&#8217;s Important to Know Inventory Valuation<\/span><\/span><\/span><\/h2>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">It is very important for companies to identify unsold items, companies usually use\u00a0 <\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">goods inventory applications<\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\"> \u00a0to identify this.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">In addition, the company certainly also requires a rate that can be multiplied by the quantity or number of goods to reach the final value of the inventory.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Each item may have a different price and may change throughout the year.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">So you have to choose the right inventory valuation method in order to get valid results.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Continuing the illustration from the previous example, here is a detailed table of inventory values \u200b\u200bthat you can see and pay attention to:<\/span><\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Period<\/span><\/span><\/b><\/td>\n<td><b><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Purchase (per pair)<\/span><\/span><\/b><\/td>\n<td><b><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Price (per pair)<\/span><\/span><\/b><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">January<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">150<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Rp. <\/span><span style=\"vertical-align: inherit;\">50,000<\/span><\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">March<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">100<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Rp. <\/span><span style=\"vertical-align: inherit;\">52,000<\/span><\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">June<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">100<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Rp. <\/span><span style=\"vertical-align: inherit;\">52,000<\/span><\/span><\/td>\n<\/tr>\n<tr>\n<td>September<\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">200<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Rp. <\/span><span style=\"vertical-align: inherit;\">50,000<\/span><\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">December<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">125<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Rp. <\/span><span style=\"vertical-align: inherit;\">53,000<\/span><\/span><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Total Items Paid<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">675<\/span><\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Total Items Sold<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">650<\/span><\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Total Unsold Items<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">25<\/span><\/span><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Inventory Value<\/span><\/span><\/td>\n<td><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">25 X (Rp. 50,000 or Rp. 52,000 or Rp. 53,000)<\/span><\/span><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Based on the table above, you can see that at the end of the year or period, your business has 25 pairs of unsold shoes.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">However, because there are increases and decreases in product prices, it will certainly make you confused in determining which rate you should use.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Therefore, you need to choose the right inventory valuation method in calculating\u00a0 <\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">the stock items<\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\"> \u00a0used.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">In the following discussion, this article will explain some of the inventory valuation methods that you can use.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Of course, this explanation also contains a discussion of how to calculate the value of inventory along with examples.<\/span><\/span><\/p>\n<pre><strong><span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/mudabicara.com\/en\/7-ways-to-succeed-in-online-business\/\">Read Also : 7 Ways to succeed in Online Business<\/a><\/span><\/strong><\/pre>\n<h2><span id=\"Macam-Macam_Metode_Penilaian_Persediaan\"><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Various Methods of Inventory Valuation<\/span><\/span><\/span><\/h2>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">In accounting, there are three methods you can use to calculate inventory value.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Among them are\u00a0 <\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">FIFO, LIFO<\/span><\/span><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\"> , and WAC (Weighted Average Cost). <\/span><span style=\"vertical-align: inherit;\">Here&#8217;s an explanation:<\/span><\/span><\/p>\n<h3><span id=\"1_Metode_FIFO_First_In_First_Out\">1. Metode FIFO (First In, First Out)<\/span><\/h3>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">This inventory valuation method assumes that the inventory that is produced first will be the first unit sold and fulfilled.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">The function of using this method is to make it easier for you to determine inventory values \u200b\u200bbased on existing inventory even if there are changes to the COGS.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Under the First-In-First-Out (FIFO) valuation method, inventory items are sold in the same order in which they were purchased or manufactured.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">The FIFO valuation method is the most commonly used inventory valuation method.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">That&#8217;s because most companies sell their products in the same order in which they buy them.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">For example, consider the following illustration:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Business A purchases several units of laptops at different times and at different prices.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">In the first transaction or purchase, business A bought ten laptops, each costing Rp. <\/span><span style=\"vertical-align: inherit;\">4,000,000<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Then, in the second transaction, business A bought another five laptops for Rp. <\/span><span style=\"vertical-align: inherit;\">5,000,000 per unit.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">By the end of the month, the business had sold eight laptops.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">With the FIFO valuation method, the cost is calculated from the first transaction, namely when buying ten laptops for Rp. <\/span><span style=\"vertical-align: inherit;\">4,000,000 per unit.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">So, how to calculate the inventory value after selling eight laptops is as follows:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Accounting balance for HPP = (8 laptops x Rp. 4,000,000) = Rp. <\/span><span style=\"vertical-align: inherit;\">32,000,000<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Two laptops are still left from the first purchase, each costing Rp. <\/span><span style=\"vertical-align: inherit;\">4,000,000, as well as five laptops from the second purchase each costing Rp. <\/span><span style=\"vertical-align: inherit;\">5,000,000. <\/span><span style=\"vertical-align: inherit;\">So:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Inventory account accounting balance = (2 laptops x Rp. 4,000,000) + (5 laptops x Rp. 5,000,000) <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= Rp. <\/span><span style=\"vertical-align: inherit;\">8,000,000 + Rp. <\/span><span style=\"vertical-align: inherit;\">25,000,000 <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= Rp. <\/span><span style=\"vertical-align: inherit;\">33,000,000<\/span><\/span><\/p>\n<pre><span style=\"color: #ff0000;\"><strong><a style=\"color: #ff0000;\" href=\"https:\/\/mudabicara.com\/en\/what-is-human-resource-development-definition-functions-and-methods\/\">Read Also : What is Human Resource Development? Definition, Functions and Methods<\/a><\/strong><\/span><\/pre>\n<h3><span id=\"2_Metode_LIFO_Last_In_First_Out\">2. Metode LIFO (Last In, First Out)<\/span><\/h3>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">The last-in-first-out (LIFO) inventory valuation method is precisely the opposite of the FIFO valuation method.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">According to the LIFO method, how to calculate inventory value is from the most recently purchased or produced items sold first.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">With LIFO, the cost of the most recently purchased or produced product is the first to be counted as goods sold.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Using this method, the lower cost of the old product will be reported as inventory value.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Continuing from the previous illustrative example, if using the LIFO method, the calculation method is as follows:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Accounting balance for HPP = (8 laptops x Rp. 5,000,000) = Rp. <\/span><span style=\"vertical-align: inherit;\">40,000,000<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Two laptops are still left from the first purchase, each costing Rp. <\/span><span style=\"vertical-align: inherit;\">4,000,000, as well as five laptops from the second purchase each costing Rp. <\/span><span style=\"vertical-align: inherit;\">5,000,000. <\/span><span style=\"vertical-align: inherit;\">So:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Inventory account accounting balance = (2 laptops x Rp. 5,000,000) + (5 laptops x Rp. 4,000,000) <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= Rp. <\/span><span style=\"vertical-align: inherit;\">10,000,000 + Rp. <\/span><span style=\"vertical-align: inherit;\">20,000,000 <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= Rp. <\/span><span style=\"vertical-align: inherit;\">30,000,000<\/span><\/span><\/p>\n<h3><span id=\"3_Metode_WAC_Weighted_Average_Cost\">3. Metode WAC (Weighted Average Cost)<\/span><\/h3>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">With the WAC inventory valuation method, inventory and Cost of Goods Sold are calculated based on the average price of all items purchased during a period.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">This method is mostly used by businesses that don&#8217;t have a lot of variety in their inventory.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Let&#8217;s use the previous illustrative example that business A has purchased a total of 15 laptops.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Which in the first transaction, there were ten laptops with a price per unit of Rp. <\/span><span style=\"vertical-align: inherit;\">4,000,000.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Whereas in the second transaction, business A bought another 5 laptops at a price of Rp. <\/span><span style=\"vertical-align: inherit;\">5,000,000 per unit.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Thus, the average cost is as follows:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">[(Number of laptops I x Rp. 4,000,000) + (Number of laptops II x Rp. 5,000,000)] \u00f7 Total Laptops<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">[(10 x $400) + (5 x $5000)] \u00f7 15<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">(Rp. 40,000,000 + Rp. 25,000,000) \u00f7 15 = Rp. <\/span><span style=\"vertical-align: inherit;\">4,300,000<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">So, after successfully selling eight units of laptops, the inventory value is:<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Inventory account accounting balance = Number of unsold items x average price <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= 7 x Rp. <\/span><span style=\"vertical-align: inherit;\">4,300,000 <\/span><\/span><br \/>\n<span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">= Rp. <\/span><span style=\"vertical-align: inherit;\">30,100,000<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Well, that&#8217;s the discussion about the three types of inventory valuation methods in accounting.<\/span><\/span><\/p>\n<p><span style=\"vertical-align: inherit;\"><span style=\"vertical-align: inherit;\">Hopefully this article can help you find references regarding inventory valuation methods for your financial reports.<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>One way to calculate the total value of inventory owned by a <a class=\"read-more\" href=\"https:\/\/mudabicara.com\/en\/what-is-inventory-valuation-method-definition-and-types\/\" title=\"What is Inventory Valuation Method? 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