An inventory is what gives us an idea, neat and detailed of elements which make up the assets of a company. The inventory specifies every detail of the assets that make up the heritage.
It is important to have an inventory control, since, with this we manage our company in a better way, and provides support on how to meet the demand, helping to make decisions at the top of the organizational structure of a company.
In this article we will talk about the valuation or valuation of inventories in companies, in addition to mentioning some methods by which we can value the inventories of a company.
What is the importance of inventory valuation?
Inventory valuation is what is cost related, and not so much with assets. When evaluating inventory, outputs and revenues, they have to do with cost, not so much with tracking physical inventory. Inventories are considered significant assets by many companies.
But now why is inventory valuation important? This importance lies in being considered when it comes to determine the cost of a sale, a correct decision-making by the company and obtaining in a period of the profits. This also gives a correct sample of what the financial situation is.
These inventory valuation methods are techniques used in order to apply and select an area of inventory, to later calculate it in monetary prices. This is decisive when it comes to buy different prices. Its main objective is to show the amount of cost that must be taken into account as an asset.
What methods exist to make this assessment?
Previously, we saw what is the importance of a inventory valuation. Which helps us through methods to evaluate, and control the cost and flow of merchandise.
This making it clear that these methods are, they are a very useful and important tool, since it gives us information to make decisions in an administrative and accounting way. Which can help us to achieve the goals of the company, having a security in the journey.
To carry out an inventory valuation, we have different methods with which to do it, among them is the FIFO (First in first out), the LIFO (Last in first out) and the Weighted Average. These three methods will be explained in more detail below.
First to Enter First to Exit
The First In, First Out, FIFO method is the one that operates, under a commodity or raw material, which enters the company first, is the first to be sold, or also the first to be exhausted. This being the cost of sales and cost of production.
Last to Enter First to Exit
In the Last In First Out method, the assumption is that all merchandise or raw material, which is entered to the latest in the company, is the first to be sold or used for production.
In this method, it consists of valuing on average the same articles of merchandise, bought by the company and the one that is in stock. Then this is divided by the number of products, so that this value is assigned as the unit cost of sales.
Each method has its pros and cons, which will depend on the business strategies of each company, the type of merchandise with which it trades and with your cost level. Each company must adjust one of these methods to its field, since maintaining an inventory requires money. Which has led to a method such as Lean Six Sigma reducing costs.
We hope this article on, The importance of inventory valuation in companies, and its different methods for inventory valuation has been helpful to you.