Inventory costing is a very
important part of the Cost Accountant's position.
The production inventory represents a major investment for most
Since inventory is valued as an asset, it is recorded on the balance
sheet in the asset section.It is critical to assign proper
and properly report it to management. If the value of the parts in
inventory is not accurate, a future write-down of the inventory holding
value may be necessary.
very large inventory costing revaluation can
have a very large effect
on the financial statements. Any correction to the inventory value
either increases or decreases asset values and either adds to or
subtracts from expenses.
For example: if we found that some of the
parts in our inventory were over-valued by $3 each, and we have 10,000
parts in inventory, we then need reduce the inventory value by $30,000
to correct the inventory. The entry to do this would be to expense
$30,000 and reduce inventory by $30,000.
inventory consists of purchased parts. These parts can be components
that are made by vendors, or any kind of raw materials that are sold to
- Work in process or WIP
inventory are raw parts that are in the process of being manufactured.
These parts will have labor and burden costs added as operations are
Inventory parts are costed based on the part routings and bill of materials.
- Finished goods inventory is the location of our
manufactured parts that are complete and ready to be shipped to our
to value parts in inventory:
about parts that are produced at a loss?
- Value usable, non-obsolete parts at the same
cost as current production parts.
- Assure that accounting
cost elements are valued properly.
burden cost is
going to change in the new year:
- The carrying value of parts produced at a loss
must reflect the
market value (i.e. sales price), not cost. This is the lower
cost or market rule.
- After calculation of the lower of cost or
market, an adjusting entry is needed to adjust
inventory to the proper value.
Obsolete parts in inventory:
- A dramatic change in the new year's volume of
parts or the product
mix causes a BIG change in the inventory costing valuation and a change
- As the volume of business changes, so does our
burden allocation, and
therefore our inventory valuation.
- This is not the fault of the Cost Accountant;
this is a change in
- Be sure to alert the management as soon as you
find out, so they can prepare to explain the change.
- Obsolete parts usually are scrapped or kept at
zero inventory value, according to management decision.
- Sometimes parts are kept for many years,
just in case they are ever needed. Of course, this is
dependent on room available in the warehouse.