Chapter 4

Chapter 4: Inventory valuation

Types of inventory: Raw materials Work in progress Finished goods

Raw materials - These are the materials that have been bought by a manufacturing business and are ready to be transferred to the production area where they will be used to make the finished goods.Work in progress - This comprises part finished goods that are awaiting completion.Finished goods - These are manufactured items that have been completed and are ready for sale. 

Valuation methodsThere are 3 main methods of valuing inventory: FIFO (First in first out) LIFO (Last in first out) AVCO (Average cost)

FIFO - Inventory that is being issued will be valued at the oldest purchase price. This means that the inventory left will be valued at the most recent cost prices. LIFO - Inventory that is being issued will be valued at the most recent purchase price. This means that the inventory left will be valued at the oldest cost prices. AVCO - Inventory that is being issued will be valued at an overage cost. The inventory left over will also be valued at an average cost. Average cost = Total cost of goods in stores/ Number of items in stores

Manufacturing account format:Opening inventory of raw materialsPurchases of raw materialsClosing inventory of raw materialsDirect materials usedDirect labourDirect costManufacturing overheadsManufacturing costOpening inventory of work in progressClosing inventory of work in progressCost of goods manufacturedOpening inventory of finished goodsClosing inventory of finished goodsCost of goods sold

Direct materials used:Opening inventory of raw materials + Purchases of raw materials - Closing inventory of raw materialsDirect cost:Direct materials used + Direct labourManufacturing cost:Direct cost + Manufacturing overheadsCost of goods manufactured:Manufacturing cost + Opening inventory of work in progress - Closing inventory of work in progressCost of goods sold:Cost of goods manufactured + Opening inventory of finished goods - Closing inventory of finished goods