Valuation of inventory

Inventories: Goods which have been purchased or manufactured and are yet to be consumed and
sold are termed as inventory.
As per accounting standard -2 the term inventory includes the following:

Inventory

Stores and Waste or

Stock Loose tools
Spares by-product

Finished
goods

Work in
Progress

Raw
materials
Objectives of inventory valuation
1. Determination of income: In order to determine the true business income during a specific
period of time proper valuation of stock is essential. The gross profit cannot be calculated
by deducting the amount of purchase from sales but the cost of goods sold is deducted from
amount of sales. The cost of goods sold means:
COGS = Opening Stock + Purchases + Direct Expenses - Closing Stock
2. Determination of financial position: The closing stock is shown in the balance sheet in asset
side as current asset. If the true stock is not recorded in the balance sheet then the balance
sheet will not show the true financial position of the business.
3. Determination of policies: In management accounting the management takes vital decisions
on the basis of ratio analysis. In ratio analysis, the value of stock is used to specifically for
liquidity ratio, current ratio etc.
Purchase of material
The quality of the finished product depends upon the quality of raw material used therein. As
improved craftsmanship can course help in improving the quality of the product but it cannot
change the basic character of the raw material used. Therefore it is essential that the purchasing
department should make the purchase of the right quality and also at the right prices to avoid the
cost of production from being adversely affected.
Purchase Cycle
The purchase cycle constitutes the following:

initiating the
purchase

Passing
Purchase
invoices for
requisition
payments

Deciding the
Inspection of important
goods factors
received relating to
purchase

Receipt of selection of
goods suppliers

Purchase
orders and
Follow Up
Important Terms:
 Bill of material: whenever a job or work order is taken in hand a complete schedule of such
materials, parts etc., along with their specifications is prepared by the planning department
and the drawing office, as would be required in completing that work. This schedule is
known as bill of materials. A copy of this bill is sent to store-keeper so that he may keep
those materials ready in stock for use in that work. The store-keeper submits the purchase
requisition on the basis of bill of materials received from different works, if he finds the
stock is short to meet the requirement. This bill is a sort of budget of materials which would
be required for completing the particular work and it, therefore contains the small as well as
highly significant items to be used therein.
 Bin-card: A bin card also known as Bin tag or stock card is a card showing quantitative
record of the receipts, issues and closing balances of the material kept in the corresponding
bin. The bin card is place in the bin or shelf or is hung over the almirah or the rack
otherwise known as Bin. Separate bin cards are prepared for each item of stores and if two
different materials are kept in one almirah, two bin cards, one for each are prepared, treating
the almirah as two bins.
 Books for recording of materials: The store accountant keeps the following books:
 Material inward book: This book is prepared by the store keeper on the basis of
goods received note. All materials which have been purchased and kept in store are
recorded in this book.
 Material issue book: This book is prepared on the basis of material requisition
form. Those material which are issued from store for completion of any work order,
job or department are recorded in this book in such a manner so that the direct and
indirect material issued can be identified properly.
 Material return book: This book is prepared with the help of material return note.
When a department sends the unconsumed material back to store, then it is recorded
in this book.
 Material transfer book: This book is prepared on the basis of material transfer
note. When certain material is transferred from one department to another then
records are made in this book.
 Store ledger: It is a record of stores, both in quantity and value and is maintained by
the stores accountant. It is similar to bin card but with the main difference that value
of material is shown in the store ledger.
 Issue of materials: there are three important notes under this- requisition note, material
returned note and material transfer note.
 Requisition note: The store keeper issues the materials from the stores on the
receipt of a document known as store requisition. The store requisition is the
document authorising the store keeper to issue materials noted therein.
 Material returned note: On the completion of work, the material left unused are
returned to the store-keeper. A material Return note is prepared in triplicate by the
department returning the material. The material is sent to the store keeper along with
these three copies. The store keeper keeps a copy with him and returns two copies
after receiving the material and signing them. One of these two copies is sent by the
department to the stores accountant for accounting.
 Material transfer note: Transfer of material from one department to another is
generally not permitted except in exceptional circumstances to avoid loss of time
and labour. If a department has excess material and the other department is in need
of the same, the transfer can be allowed on the basis of material transfer note.