Inventories are covered by IAS 2 Inventories, and there are three methods of valuing or measuring the cost of inventory allowed. These are
- First in, First Out (‘FIFO’)
- Weighted Average Cost
- Actual Cost
What Method Should you use to Value Inventories for ACCA F7?
First in, First Out
FIFO is a considered a good method of valuing inventory where there are large quantities involved. By using FIFO, the oldest inventory is considered to be sold first, so the cost/value of the inventory in the financial statements is alway the most recent. This provides a good valuation of the inventory as the most recent cost is most likely close to the actual value of the inventory.
Weighted Average Cost
Weighted average cost is used where the inventory is all the same, or very similar. For example, if a company’s inventory is wheat. It would not be possible to identify each load of wheat, as they’d all be mixed. In this case, a weighted average cost of the inventory is useful.
If we can identify each individual item of inventory easily, we should use the actual cost for the financial statements. This is normally used for high-value items, like jewellery or cars.