Inventory Valuation

Introduction

Inventory valuation is an accounting practice that is followed by companies to find out the value of unsold inventory stock at the time they are preparing their financial statements. 

The link below explains the different methods used by companies for inventory valuation.

https://youtu.be/6nXUO_RwVy4

During this lesson you will learn: 

  • What is inventory valuation
  • The importance of inventory valuation
  • Different inventory valuation methods
  • How to calculate: 
  1. Cost of Sales
  2. Closing Stock
  3. Average stock-holding period
  4. Sales

Using Specific identification method and Weighted average method.

Task

Watch and listen to the video below in order to answer the following questions:

https://youtu.be/zksCGDokxEU?t=1611

INFORMATION

Bamjee Stores sells two types of men's watches:

  • Johx, imported from Germany
  • Kwatz, locally manufactured

A)  The business uses the following methods to value the stock of watches:

  1. Johx - specific identification
  2. Kwatz - weighted average
  • No watches were stolen or lost during the financial year.

B) Information relating to Johx watches:

  UNITS UNIT PRICE TOTAL AMOUNT UNITS SOLD TOTAL SALES  
Opening stock 12 R 6 500 R78 000 11 R125 125  

Purchases

 35   R252 000      
September 2020 15 R 6 800 R102 000 10 R119 000  
January 2021 12 R 7 300 R87 600 10 R127 750  
April 2021 8 R7 800 R62 400 5 R 68 250  
  47   R330 000 36 R440 125  
  • The cost price of Johx watches includes transport costs and custom duties.
  • These watches are sold at a mark-up of 75% on cost

C) Information relating to Kwatz watches:

  UNITS UNIT PRICE TOTAL AMOUNT
Opening stock 95 R340  R32 300
Purchases: 675   R259 900
September 2020 320 R375 R120 000
January 2021 210 R390 R81 900
April 2021 145 R400 R58 000
  • Kwatz watches are sold at a fixed selling price of R520 each.
  • Cost to transport Kwatz watches from local suppliers amounted to R11 950 for the financial year and is not included in the figures above.
  • There were 92 Kwatz watches in stock on 31 August 2021.

REQUIRED:

1.1 Calculate the following in respect of Johx watches on 31 August 2021:

  • Closing stock                                                                                                                                                 (5)
  • Cost of sales                                                                                                                                                  (4)
  • Average stock-holding period (in days)                                                                                                      (4)

1.2 Calculate the following values (in rands) in respect of Kwatz watches on 31 August 2021:

  • Closing stock                                                                                                                                                 (7)
  • Sales                                                                                                                                                               (3)

1.3 Explain why the business uses different methods to value each type of watch. State one valid point.

                                                                                                                                                                                  (2)

Process

To complete the task read the information provided carefully and calculate the required using the specific identification  method and the weighted average method.

step 1: Clearly indicate the formula for each method used

step 2: Show all calculations in order to obtain full marks (Don't show final answer only)

To assist you with this task see attached video as a guide for :

specific Identification method

https://www.youtube.com/watch?v=cmOwxqlMZ9Q

weighted average method:

https://www.youtube.com/watch?v=TsaXnlB6TA8

 

Evaluation

INVENTORY VALUATION RUBRIC

SPECIFIC IDENTIFICATION METHOD

 

 

Closing stock
  • Clearly shows  the units on hand multiplied by the unit price for each month provided.

 

 

  • Correct final answer

4

 

 

 

 

1

 

 Cost of sales
  • Clearly shows the correct amount for:

          Opening stock

          Purchases

          Closing stock

 

  • Correct final answer

 

3

 

 

 

 

1

 Average stock-holding   period

 

  • Used the correct formula for average stock – holding period

 

  • Correct final answer

 

 

3

 

1

 

WEIGHTED AVERAGE METHOD

 

 

 Closing stock
  • Used the correct formula to calculate closing stock

 

  • Multiplied by the correct amount of closing stock units

 

  • Correct final answer

 

 

5

 

1

 

1

 

Sales
  • Used correct amount for:

         Opening stock and purchases

         Selling price

  • Correct final answer

 

2

 

 

1

 

Explain why business use different methods to value each type of watch.
  • One valid point

2

 

 

 

TOTAL

 

25

 

Conclusion

The learner should able to know the different valuation methods which are used by companies, and should be able to apply these methods on various stock calculations provided.

For further studies the learner can make use of YouTube videos and download Mind set App and  Past paper South Africa for more exposure and exercises to excel in the module.

Now we have focused on two methods, on our next task we will focus on FIFO and LIFO.

 

Credits
Teacher Page

Thank you for your attendance and corporation, now we have covered Specific identification method and Weighted average method.

On our next class we will do FIFO and LIFO methods.