The Concept of Inventory Valuation
The inventory as defined by Chambers Universal Learners Dictionary (1980) is a formal and details list of goods example hence furniture or business stock.According to Horngreem (1978), Inventory is aggregated of these items of tangible personnel property which and held for sale in the ordinarily course of business and in process of production for such sale are to be currency consumed in the production of goods and service to be available for sale. Pendy in foundation to inventory management saw inventory as stock of the product as company is manufacturing for sale and the component that make up in the product. He also said that inventory constitute the most significant of current assets of a large company. It therefore becomes imperative that inventory should be so as to reduce the uncertainties by investing on them.
From the Nigeria statement for accounting standard inventory is referred to as stock and it is defined as items of value held for use or sale by an enterprise and usually comprise raw-material and supplies used in production work in progress and finished goods.
This is statement again suggests that and reporting inventory gives rise to wide differences in the result of operations of enterprise in the same live of business. Thus it seek to narrow such difference by setting a standard for the valuation and presentation of items of inventory in the of historical cost. Hence valuation by chambers universal learns dictionary (1980) is an estimated price of property stock or land. It could also be seen as a clearant of management task, which of financial values of property land stock etc.
Ackano (1981) said the purpose of inventory is to a competitor or through a large delay in filling an order he further said that the aim of the managers of inventory management should be that of finding how to get the greatest return to the business for carrying inventories Vis- visa the total of retaining them. It there fore rest with the manager to continually determine the level f inventory holding at which the firm can recate the opium returns. In doing this the manager has to resort inventory levels to sales volume and gross profit and also to the total inventory caring cost. Naturally, there must be standard or inventories in a situation where there is a dorp in the inventing level.
Pending ibid pointed out that any act to the contract will be harmful to the long-rum profit ability and ultimate failure at the firm This of course could be achieved by means of simply plaing and control techniques. On this same issue of the need for inventory the writer made it clearness why depite to clear why depite to clearns in holding inventory motives precaution any motives transactional motives and speculative motives. From the practical point of view inventory valuation is simply the means by which merchandise materials, good in process finished goods, supplies on hand in are estimated or valued. By accounting and physical method of valuation implications. In many organization inventory valuation and control is perhaps the most important techniques having a direct relationship with production, marketing and financial policies.
If production and delivery of goods were instantaneous there will be no need for inventories except as hedge against price changes.
Inventories must be maintained so that turn balance will be easily identified. Production operation can not flow smoothly without having inventories of raw materials, work in process, finished goods and supplies. It is there fore necessary to maintain a five valuation of inventory to ensure efficient production. Sales and purchases of direct materials. Herzbery (1959) believe that the primary function to any organization whether religions, political or industria should be to implement the needs of man to enjoy a meaningful existence. Financial organization helps to achieve this valuation of material of responsibility and documentary evidence obtained at various levels of operation. This begins by the approved of sale and production budgets and finished goods which are semt to the stores or to customers. This inventory valuation operate as successfully when inventories operate successfully when inventories increase or danseuse following a pre- determined and pre dictable pattern related in pattern related in amount and time to sale requirement and production schedules.
The objectives of inventory as written by matz (1984) is make sum that inventories are valued from the time an order is placed on to the time the goods are sold. But the reasons for keeping inventories could be summarized in the following statements.
- To absorb several fluctuation in the usage of material or demand.
- To enable production process more on smoothly and efficiently.
- As a deliberate investment policy possible storage.
- To enable production process, more on smoothly and effectively.
- To ensure that sufficient goods are available to meet anticipated demand.
- Inventories must be maintained so that customers may be served immediately before turning to another source or supply
- To absorb variations in demand and production and take advantage of bulk purchases.
- As a necessary part of production process in some organization will always went to avoid. It included;
- Danger that inadequate inventory disrupts production.
- Excessive inventories introducers unnecessary coming cost and absence.
According to Mats again he believes that whether as a deliberate policy or not, stock inventory represents an investment by the organization.
As with any other investment the cost of holding inventories must be related to the benefits to be gained. To do this, effectively and efficiently inventories must be properly valued however, the aim of inventory decision is usually to minimize the total relevant costs. Two central decisions must be faced in designing and inventory control system that how much should be brought or manufacture regardless of the complexity. All inventory planning models focus of the firm problem of size and timing.
To ensure proper overcoming of these problems inventories must be properly recording or valued.
Referring to the association of student accountant (1981) it is imperative and infect an every day occurrence that valued at the end of each accounting period by the manufacturing for accounting purposes this is precipitated by the fact that some items manufactured in one accounting period are pushed into the next accounting period.
Consequently, some inventory valuation principles were envanciated by accounting profession to deal with this phenomenon as different conditions prevail in different periods under different circumstances. Any neglect of inventory valuation will result in the false picture of company financial
Statement. Based on this prevailing circumstance inventories should be value below cost for balance sheet purposes. The ultimate aim is therefore to make provision for anticipated loss which will represent the difference between the cost of manufacturing and the lower figure at which they have been valued.
Be that as it may the accepted slogan of the accounting profession which has been in use for many years in that basis of valuation should be the lower of cost or realizable value. Although that constitutes inventory varies in various organizations.
The manufacturing concern will have as its cost the overhead that directly related to production overhead carrying forward in inventory instead of being charged against current revenue etc. the inclusion of all these is necessary in the valuation of inventories visa –vis manufacturing company. Form the articles against it could be deduced that inventories should be values or at the lower cost net replacement price. This follows that accounting concept that profit should be taken until realized hence inventories should not be valued above cost and any expected losses should be provided in full. If inventory is to be valued or controlled effectively it is unwise to rely entirely on inventory records however comprehensive it is. Therefore it is absolutely necessary to check the physical existence of the inventory to make sure that the qutity seen is the same as it quality recorded as inventory.
Wilkmson (1984) said the actual counting of stock can be quit an arduous task because it means checking item of inventory, pricing it multiplying. The price by the number of item in the inventory and adding the entire total. In retail business prices are often reduced for a predetermined sale in order to minimize the amount to be counted. This can also clear out show moving of item and leans a line. Inventory may be classified into several alternative accounts depending on the business. Accounting to Welsh etal (1974) ‘the kind of inventory that is usually held depend upon the characteristic of the business that is whether retail or while sale business or manufacturing business in those retail or whole sale business or we have merchandise inventory resals in the normal course of business. It includes inventories like finished goods, work in progress it includes goods or held form resale in the normal course of business. It includes inventories like finished goods, work in progress and raw materials.
Further more, Meigs etal (1962) said that at any given movement a manufacture must have on hand three separate inventories. A stock of raw materials particularly, completed products in various sages of manufacture and finished goods waiting for sale. Inventories of each of these three classes of item must be taken at the end of each period in order to determine the cost of inventories on hand and the cost of goods sold during the period.
RAW MATERIAL
Raw material inventory includes the tangibles goods acquired for direct use in the production process. It include material acquired from actual resource such as the barley used in believer industries.
GOODS IN PROCESS:
Goods in process sometimes called work in progress) inventory includes the product that has been started in the manufacturing process but has not yet been completed. This partially completed inventory includes three cost components as raw material, direct labour and manufacturing overhead.
FINISHED GOOD
Finished goods inventory includes the completed manufactured products aviating sales. It also has the same three components as the goods in progress inventory, but all the cost are combined into a single complete unit.
ITEMS TO BE INCLUDED IN INVENTORY QUANTITIFES AND DETERMINATION OF INVENTORY COST.
The basis interior for including items in inventory is legal ownership when ownership transfers to a company the item should be included in its inventory even through the company may not have physical possessions. Thus, Welch (ibid) rightly said that when country the physical quantity of goods in the inventory a company should include all items to which it has ownership of regardless of units locations. In purchasing and sales transaction accounting focuses on the passage of ownership. Usually when ownership passes one-part records be purchased in the inventory of the seller. In a sale transaction, the basic avidcline that ownership to goods passes at the time intended by the parties to the transaction. The ownership only passes when the seller gives the goods to the buyer. However, there situations in which this is not the case.
From the practical point or view goods are received by the purchase and recorded as sold by the seller when shipped. When financial statement are prepared, however all goods legally owned should be included in inventory or the seller although the seller may not have physical possessions. Equally, when ownership passes to customer because of a sale, the item should excluded from the sellers inventory even though the company many still have physical possession similarly, the buyer should included those items in inventory if ownership has passed, although it may not have physical possession.
DETERMINATION OF INVENTORY COST
Goods in inventory are recorded in conformity with the cost principles as follows: “the primary basis of accounting inventory cost which is the price paid or consideration given to acquire assets. The accounting statement standard says cost is the usual basis for use in producing goods and service or for direct sale to customer but when applied to inventory it simply means the sum of the applicable expenditure and charges directly or indirectly incurred in bringing an article to its existing condition and location. Alter natively, all expenditure necessary to obtain future service utility of the inventory are part of the purchase cost one expenditure is no more or less critical value any of the order in that regard. Following closely to this time of reasoning comes the matching concept which implies that all costs should be carried forward as asset unit the year of sale. It should also be matched against sales revenue as part of the cost of goods sold expensively in order to measure income.
2.4 ORGANIZATION OF PURCHASE DEPARTMENTS
In order to ensure the correct recording of the materials used on an various jobs or processes a sound system for the purchase, receipt, inspection, storage and issues of materials must be stalled.
Referring to Vicky (1973) the purchase of goods is carried out through a buying department which is notified by means of purchase requisition from the store department when the stock of any particular material is filling low and requires replenishment. When new supply of material is delivered at the works, it is received by either the store keeper or the goods received clerk who examines the goods, checks the quantity and enters full particulars of the delivery in duplicate on a good received note. Investigation shows models of notes and cards used by manufacturing companies
Tables show the purchase Requisition note goods received note. Bin card, stock record card.
—This article is not complete———–This article is not complete————
This article was extracted from a Project Research Work/Material Topic
“INVENTORY VALUATION AS AN AID TO MANUFACTURING INDUSTRY
(A CASE STUDY OF TEA- TIME PORTED INDUSTRY ENUGU).”
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