> Eugene Vital <> wrote:
>
>> The first step I need to accomplish is the cost of inventory for
>> the period (monthly). I have already done the calculations for
>> material used (calculated), sales, labor cost and material received.
>
Well, the first step in this case is to determine which valuation method the
company follows. There are several methods, as per the accounting
principles:
Last purchases
F.I.F.O. (first in first out)
L.I.F.O. (last in first out)
Average prices
etc.
Depending on which method you use, two very important things will vary: the
gross profit and ultimately the amount of income tax the company will pay,
based on gross profit minus expenses minus whatever other deductions are
permitted by the tax laws in your country.
To give you an example, if the company uses the FIFO method, gross profit
increases and the value of inventories at year end increases.
If , on the other hand, they use LIFO, the opposite occurs.
Let me clarify this
date units purchased unit cost total cost
5/06 10 10 100
6/06 10 12 120
at the end of june your inventory is valued at 220. If you use the FIFO
valuation method and you sell, say 18 units before june 30:
units sold cost of sales
10 at 10 100
8 at 12 96
totals 18 196
your inventory on hand is 2 units at 12 dollars, ie 24 dollars
But if you use the LIFO valuation method:
units sold cost of sales
10 at 12 120
8 at 10 80
totals 18 200
Inventory on hand: 2 units at 10 dollars: 20 dollars
In the FIFO scenario your cost of sales is lower than in the LIFO scenario.
Therefore your gross profit is greater and the value of your inventory at
year end is higher.
It has been ages since I studied accounting and there are several other
valuation methods that can be applied. But it depends, as I said earlier, on
what rules on inventory valuation are accepted by the taxation authorities
in each country.
I think you should consult with management and the company auditors, to
determine what valuation method they use and then, you start coding your
inventory routines accordingly.
Rafael Copquin
www.copquin.com.ar
Universal Thread Magazine - Translation Coordinator
Treasurer - Microsoft Users Group of Argentina (MUG)
www.mug.org.ar
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