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 market
Materials, 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:

  1. Purchases of productive material
  2. Purchases of supplies, services, and repairs
  3. Materials purchasing forms
  4. Receiving materials
  5. Invoice approval and data processing
  6. Correcting invoices
  7. Electronic data processing (EDP)  for materials received and issued
  8. Cost of acquiring materials
  9. Storage and use of materials
  10. Issuing and costing materials into production
  11. Materials ledger card – perpetual inventory
  12. First-in-First-Out (FIFO) Costing Method
  13. Average Costing Method
  14. Last-in-First-Out (LIFO) Costing Method
  15. Other Methods-Month end average cost, last purchase price or market price at date of issue, and standard cost
  16. Inventory valuation at cost or market whichever is lower
  17. American Institute of Certified Public Accountant (AICPA) cost or market rules
  18. Adjustments for departures from the costing method used
  19. Inventory pricing and interim financial reporting
  20. Transfer of materials cost to finished production
  21. Physical inventory
  22. Adjusting Materials Ledger Cards and Accounts to Conform to Inventory Accounts
  23. Scrap and waste
  24. Spoiled goods
  25. Defective work
  26. Discussion Questions and Answers about Controlling and Costing Materials

 



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