Weighted Average Inventory Valuation Method
Translated by
ScribdTranslationsWeighted Average Inventory Valuation Method
Translated by
ScribdTranslationsWeighted average method
Inventory accounting places a specialimportance in the evaluation of
inventoriesor how companies value goods available for sale.
Los métodos de valuación determinan cómo es que la empresa distribuye los costos
of the products between the inventory and the cost of sales with the consequent
impact on accounting results.
The weighted average cost in cost accounting is a valuation method.
of inventories that estimates the cost of goods sold through the application of
an average, considering the cost of the goods and the recorded quantities.
In many cases, it is the simplest inventory valuation method that could be
use the company.
The weighted average cost inventory valuation method divides the
total inventory costs among all goods available for sale.
The basic formula includes dividing the total inventory cost by the number
of specific articles. Companies can make these calculations as a
batch valuation (periodic system) or adjust the costs of all inventories
current and new (perpetual system).
In any case, it is a method usually accepted in business and of
agreement with himCorporate Finance Institute Inc. The average cost
weighted as an inventory valuation method is accepted by both
accounting principles (GAAP) promoted by theStandards Council of
Financial Accounting and the International Financial Reporting Standards
(IFRS)
¿Which companies use the weighted average method?
Production companies generally use the valuation method.
of weighted average inventory.
Process costing systems produce goods continuously.
weighted average valuation methods allow the company to avoid the
separation of assets in the system, usually a very complicated matter
especially in chemical processes or manufacturing based on mixtures, where a
product merges with another without the possibility of distinguishing between chronological layers of
inventories.
Other companies can also use this weighted average method for their
benefit. Companies that sell many small similar products, such as
The agricultural industry, bulk mining generally uses this method.
PEPS
The PEPS method (or FIFO, for its initials in English) is a system that facilitates the
immediate release of the merchandise that entered the warehouse first. Hence the term
first in, first out
This method is used when the company uses the perpetual system of
inventories, which facilitates its control by recording with a kardex the
entry and exit of merchandise, as well as the stock in the warehouse.
In that kardex, each product is recorded along with the acquisition value, the date of
acquisition, the value and release date.
This way, the stock is constantly renewed, preventing the products
they have been in the warehouse for a long time. On the other hand, when the interval ends
accounting, the inventories are valued according to the latest prices of
acquisition, while the current cost is recorded in the final inventory.
The cost of sales is subject to the prices of the initial inventory, as well as that of
the initial sales, so it is not updated. All of this has an impact
considerable financial. The valuation of the cost of sales with the initial prices
it provokes the overvaluation of the merchandise, a lower acquisition cost,
higher profits and a larger ending inventory.
What benefits does it bring?
The FIFO method facilitates the order of inventory exit according to its date of entry.
to the warehouse, as well as the location within it. It also allows knowing the
cost of goods sold in each transaction and in total; know the
inventories after each transaction and the gross profit. Even when there is
returns, also reenters with the same amount as when it was sold.
The FIFO method shows inventories with the most recent costs, which is
translate into greater utilities when assessing goods and, therefore, in a
higher tax estimate. In addition, it prevents goods from devaluing or
they are sold in the warehouse by giving them an appropriate exit.