Adjustments for Departures from the Costing Method Used–Inventory Valuation
Adjustments for Departures from the Costing Method Used–Inventory Valuation
The problem of year end inventory valuation is primarily a question of the materials cost consumed in products manufactured and sold to customers and the cost assignable to goods in inventory ready to move into production and available for sales the next fiscal period. This question is important, because the materials ledger card would have to be adjusted for any change in units prices if there is a departure from the commonly used costing method. Since the new unit price could not be made available to the materials ledger clerk for some time after the year end inventory was taken and priced, the detailed task of changing hundreds and even thousands of costs would be cumbersome and time consuming. Therefore, instead of adjusting the ledger cards, companies may create an inventory valuation account, as illustrated by the following journal entry:
Cost of goods sold or factory overhead control |
xxx |
Dr |
Materials–Allowance for inventory decline to market |
xxx Cr |
|
Inventory adjustment – Lower of cost or market |
In the subsequent fiscal period, materials–allowance for inventory decline to market is closed out to cost of goods sold to the extent necessary to bring the materials consumed that are still carried at a higher cost to the desirable lower cost level.
Use of the valuation account retains the cost of the inventory and at the same time reduces the materials inventory for statement purposes to the desired cost or market, whichever is lower valuation without disturbing the materials ledger cards. The preceding entry should result in the following balance sheet presentation:
Material, at cost Less allowance for inventory decline to marketMaterials, at cost or market, whichever is lower |
$100,000 5,000 ——– |
$95,000 |
The net charge to cost of goods sold may be shown in the cost of goods sold statement or deducted from the ending inventory at cost, thus increasing the cost of materials used. Whenever the lower of cost or market procedure is applied to each inventory item and the adjustment of materials ledger cards to a lower market figure is not burdensome and the data are available early in the next year, the adjustment should be accomplished by dating the entry with the last day of the fiscal period just ended and entering in the balance section the units on hand at the unit price determined for inventory purposes. In such a case, the credit portion of the adjusting entry would be to the materials account.
You may also be interested in other useful articles from “controlling and costing materials” chapter:
- Purchases of productive material
- Purchases of supplies, services, and repairs
- Materials purchasing forms
- Receiving materials
- Invoice approval and data processing
- Correcting invoices
- Electronic data processing (EDP) for materials received and issued
- Cost of acquiring materials
- Storage and use of materials
- Issuing and costing materials into production
- Materials ledger card – perpetual inventory
- First-in-First-Out (FIFO) Costing Method
- Average Costing Method
- Last-in-First-Out (LIFO) Costing Method
- Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
- Inventory valuation at cost or market whichever is lower
- American Institute of Certified Public Accountant (AICPA) cost or market rules
- Adjustments for departures from the costing method used
- Inventory pricing and interim financial reporting
- Transfer of materials cost to finished production
- Physical inventory
- Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
- Scrap and waste
- Spoiled goods
- Defective work
- Discussion Questions and Answers about Controlling and Costing Materials
Other Related Accounting Articles:
- Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts – Inventory Valuation
- Discussion Questions and Answers
- Addition of Materials – Increase in Unit Cost
- Beginning Work in Process Inventories
- Addition of Materials – Increase in Units and Change in Unit Cost
- Beginning Work in Process Inventories
- Difficulties Encountered in Process Costing Procedures
- Inventory Audit Method
- Inventory Conversion Period
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