Every year your inventory valuation has to be recorded in your balance sheet. This implies two main choices:
- The way you compute the cost of your stored items (Standard vs. Average vs. Real Price);
- The way you record the inventory value into your books (periodic vs. Perpetual).
Standard Price means you estimate the cost price based on direct materials, direct labor and manufacturing overhead at the end of a specific period (usually once a year). You enter this cost price in the product form.
The Average Price method recompute the cost price as a receipt order has been processed, based on prices defined in tied purchase orders. The average cost does not change when products leave the warehouse.
From an accounting point of view, this method is mainly justified in case of huge purchase price variations and is quite unusual due to its operational complexity. Your actually need a software like Kiu BMP to easily keep this cost up-to-date.
This method is dedicated to advanced users. It requires well established business processes because the order in which you process receipt orders matters in the cost computation.
For Real Price (FIFO, FEFO, etc), the costing is further refined by the removal strategy set on the warehouse location or product’s internal category. The default strategy is FIFO. With such method, your inventory value is computed from the real cost of your stored products and not from the cost price shown in the product form. Whenever you ship items, the cost price is reset to the cost of the last items shipped. This cost price is used to value any product not received from a purchase order
FIFO is advised if you manage all your workflow into Kiu BMP (Sales, Purchases, Inventory). It suits any kind of users.
Kiu BMP allows any method. To change it, check Use a ‘Fixed’, ‘Real’ or ‘Average’ price costing method in Purchase settings. Then set the costing method from products’ internal categories. Categories show up in the Inventory tab of the product form.
Whatever the method is, Kiu BMP provides a full inventory valuation in Inventory ‣ Reports ‣ Inventory Valuation .