Inventory Valuation

The assessment of inventories is important for many companies. The distinction between initial assessment and subsequent assessment must be made.

Assessment of Inventories

The initial assessment of raw materials is carried out at acquisition cost. In determining the acquisition cost, however, not only the purchase price is decisive but also any additional costs such as acquisition-related expenses or subsequent acquisition costs. Deductions must be made for price reductions (acquisition cost reductions). Acquisition costs include, for example, duties, commissions, or transportation costs. Subsequent acquisition costs arise from purchase price increases occurring later. Cost reductions mainly include discounts and rebates.

For the initial assessment of semi-finished or finished goods, the focus is on determining the production cost. This includes materials and direct manufacturing costs, labor hours, and overhead costs.

Subsequent Assessment

In the subsequent assessment, the value of the inventory is re-evaluated after a certain period. Price changes can thus increase or decrease the value of inventories. The two most common variants for subsequent assessment are the principles of Lifo and Fifo. Lifo stands for "last in, first out"; Fifo, on the other hand, means "first in, first out". Both variants can lead to different results in the assessment of inventories. As with other assets, the lowest value principle must be maintained when assessing inventories. This results in the need for value adjustments.