Understanding Inventory Valuation and Item Cost
Inventory valuation is a method for calculating the value of your company’s inventory items. Using inventory valuation allows you to use the cost of goods sold (COGS) and item selling price to perform profit calculations and to track your total inventory value as a general ledger asset in your accounting system.
The total value of your inventory items is the sum of the value of each item. The value for each item is calculated as the quantity of the item available multiplied by the item cost. The item cost used for calculating the item value depends on the valuation method selected. For the standard cost method, the cost of an item is the cost assigned to that item in AcuityLogic Admin. For the two average cost methods, the cost of an item is calculated when the item is received into inventory and the average cost on the receipt is different from the current average cost of the item.
For example, if you purchase three of a frame at $50 each and later purchase the same frame at $30, the item cost for the frame would be:
- Standard Item Cost: $50 or cost assigned in AcuityLogic Admin
- Average Item Cost: $45 or total priced paid ($180) divided by quantity (4)
As a result, the value for the frame would be as follows:
- Standard Cost Inventory Value: 4 x $50 = $200
- Average Cost Inventory Value: 4 x $45 = $180