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The Methods Of Inventory Valuation

As you focus on evaluating your inventory it is important to look at the system that you have in place and to figure out what is working and what isn't working. Inventory is something we all need to have in order to keep up with customer sales but it is vital that you look for different ways in which you manage inventory so it doesn't become an expensive overhead cost for the company but it still provides you with enough to have supplies that can be shipped out to your customers if they place an order.

If inventory overhead costs start to get out of control it will end up leading to a number of problems from cash flow concerns to expensive production costs. You need to be able to understand the manufacturing costs that you have and to properly control them so they do not skyrocket out of control and cause you to have issues that can hurt your organization. Damaged goods can also increase your inventory expenses as you have to replace these goods.

There are different methods of inventory valuation, how can you find one that will be able to work well for your situation? It comes down to several things including the cost of implementing the program as well as the cost of warehousing the items and other things. Look at your balance sheet to find out how much you need to make in order to break even with the inventory costs. Here are some of the methods that you need to consider:
- First in first out - this is a fairly common inventory valuation method. You will end up sending out the products that were created first to the customers. It's often called "Just in time" manufacturing since you are making the products to order. This is a great method so you don't have a high amount of inventory sitting around your warehouse or facility. Using just in time you do not need to worry about inventory losing it's value as it will not be sitting for long. It's when inventory is sitting for weeks, months, or years that it starts to decrease in value and you have to look at writing off some losses for the company.
- Last in first out - with this inventory valuation method you will end up having the inventory that was created last used first. What this means is you will not end up with a major decrease in the product unit price as you are able top maintain a higher value for the inventory based on the economy. The reason many companies use this inventory valuation method is to prevent against inflation and economic downturn. You will need to consider some other things as well like the cost of goods sold compared to the taxable profits for the company. There is a downside and that can be due to spoilage due to items that do not sell.
- Weighted average method - using this inventory valuation method you will be able to determine the cost of your inventory through how much it cost you to purchase it initially and how much the inventory items are being sold for. The downside you will face is that you have inventory that is going to deal with the status of the economy so you may be unable to make as much with your products due to the weighted average return for the products.

It is important to review your inventory to find out what will work and what will not work for your organization. The inventory that you deal with is always going to be impacted by the economy as it can increase and decrease based on inflation.

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