Inventory costing methods

5/10/2021

Each enterprise, depending on the characteristics of its production and business, applies the inventory value method, can choose the methods that are convenient in the calculation process but must be used consistently in accounting.

Currently, according to Circular 200 (Circular No. 200/2014 / TT-BTC), there are 3 common methods to calculate inventory value, they are:

  • Specific Identification Method
  • Weighted average method after each importation or at the end of the period
  • First in, first out method

Which method enterprise chooses to calculate the value of inventories must ensure consistency throughout the accounting year.

Specific Identification Method:

The specific identification method is applied based on the actual value of each purchased goods, each manufactured product, so it only applies to businesses with few stable goods and identifiable.

According to this method, which products, supplies and goods are left in the warehouse of any imported goods, the unit price of that shipment shall be used to calculate.

  • Advantages: This is the best option, it complies with the matching principle of accounting, the actual cost matches the actual revenue. Value of stock for sale in accordance with the revenue generated: inventory value is reflected in its actual value.
  • Disadvantages: Applying this method requires strict conditions that only businesses with a few types of items, inventories of great value, stable goods and identifiable inventories. This method cannot be applied for businesses with many types of goods.
Weighted average method:

This method often used by many enterprises. According to this method, the value of each inventory item is calculated according to the average value of each inventory item at the beginning of the period and the value of each inventory purchased or produced during the period. The average value can be calculated each period or after each imported shipment, depending on the specific conditions of each business.

At the end-of-period weighted average price

This method is suitable for businesses with few sales points but the number of times of import and export of products is much. Based on the actual price and the beginning inventory, accounting will determine the average price of a product or goods unit.

According to this method, it is not until the end of the period that the cost of inventory in the period is calculated. Depending on the period applied by the enterprise, the inventory accountant shall base on the import prices, the volume of inventories at the beginning of the period and the import in the period to calculate the average unit price:

  • Advantages: Simple, easy to do, only need to calculate once at the end of the period.
  • Disadvantage: The accuracy is not high, moreover, the calculation work is accumulated at the end of the month, affecting the progress of other sections. In addition, this method does not meet the timely requirements of accounting information at the time the transaction arises.

Weighted average price after each import

After each import of products, supplies or goods, the accountant must re-determine the real value of the inventory and the average unit price. The average unit price is calculated by the following formula:

  • Advantages: This method overcomes the disadvantages of the above method, both accurate and regularly updated.
  • Disadvantage: This method takes a lot of effort and calculation many times. Therefore, this method is applied in businesses with few types of inventory, with little import-export volume.
First-in, first-out (FIFO) methods:

First-in, first-out methods are used on the assumption that stock purchased or produced first is shipped first, and that remaining inventory at the end of the period is the value of inventories purchased or produced near the end of the period.

Under this method, the value of inventory is calculated according to the price of goods in stock at the beginning of the period or near the beginning of the period, the value of inventory at the end of the period is calculated according to the price of inventory at the end of the period or near the end of the period.

This method is suitable in case the price is stable or in a downtrend, often applied to enterprises trade in drugs, cosmetics...

  • Advantages: Can calculate the cost of goods delivered to the warehouse each time of shipment, thus ensuring timely data provision for the accountant to record the next stage as well as for the manager. The cost of the inventory will be relatively close to the market price of the item. So, the inventory index on the accounting report has more practical meaning.
  • Disadvantages: Makes the current revenue not match the current expenses. Under this method the current revenue is generated by the value of products, supplies and goods acquired long ago. At the same time, if the quantity and types of items are large, continuous import and export arises, leading to the accounting costs as well as the workload will increase a lot.

Each inventory value method has certain advantages and disadvantages. The accuracy and reliability of each method depends on management requirements, qualifications, professional capabilities and the level of computing tools and information processing facilities of the business. At the same time, it also depends on preservation requirements, complexity of types, specifications and fluctuations of materials and goods in the enterprise.