Inventory valuation is an accounting practice for companies to find out the value of unsold items at the end of the financial year. Inventory valuation methods help calculate the monetary value of remaining inventory, evaluate cost of goods sold and eventually affect your profitability. This is why it is important to choose the right inventory valuation method for your business. Within EZRentOut, you can use two options including:
1.First-in, first-out (FIFO):
Items that are purchased first will be sold out first. This means the oldest Inventories are sold first. It is a good valuation method for companies to show actual flow of items.
2. Average Cost Method (AVCO):
Items are valued on an average cost of all items purchased during the period. This method is used when Inventory items are so knitted together that it’s difficult to assign cost to an individual item.
Learn more: Simplify Inventory Management Challenges With Online Rental Software
Let’s look at this in more detail
Getting Started With Costing Methods
To get started, go to Company Settings -> Valuation & Costing Methods for Items
You can choose the three methods below for Inventory and Asset Stocks:
- Default Add Stock Price: The stock will be valued at the default price added
- First-in, First-out (FIFO): The oldest Inventory Items are sold first, meaning Inventory Items are sold in the order in which they’re purchased.
- Average Cost Method (AVCO): The cost of goods sold will be calculated on average stock price of all Items.When selecting Average Cost Method, it gives you two options for adding new stocks
- Add new stock at default add stock price: The new stock will be added at the default price.
- Add new stock at average cost per unit price:Selecting this option will enable adding all new stocks at the current average price of Items. Please note that prior items before enabling this setting will not be affected.
Note: Assets can be valued at cost price or depreciated value.
How are Costs of Inventory Calculated?
Once you’ve selected an appropriate valuation for your Items, this is how it’s calculated:
1. First-in, First-out Calculation
You have purchased Asset Stocks
10 Items @ $200 at 01/01/2020
20 Items @ $300 at 03/05/2020
During the year, 05 Items were rented out, cost of goods sold using FIFO method will be:
05 Items * $200 = $1,000
Note: The first purchase price i.e: $200 will be used in FIFO method.
At the end of year, remaining Asset Stock value will be calculated as follows:
(05 Items * $200) + (20 Items * $300) = $7,000
2. Average Cost Method Calculation
You have purchased Inventories
15 Items @ $250 at 15/02/2020
35 Items @ $150 at 02/04/2020
60 Items @ $200 at 05/05/2020
During the year, there were 50 Items rented out. The average cost will be calculated before costing rented out Items.
The average cost will be:
($250+$150+$200)/(15+35+60) = 5.45
The cost of goods sold using Average Cost Method (AVCO) will be:
50 Items * $5.45 = $272.50
At the end of year, remaining Inventory value will be:
Remaining Inventory Items:
(15+35+60) – 50 = 60 Items
60 Items * $5.45 = $327
Orders Detail Page
Once you’ve enabled costing method settings,it is easier for you to track Item’s price, unit cost price and total cost price under the Order details page as shown below:
Inventory/Asset Stock Detail Page
The Average Cost Method (AVCO) method adds Average Cost/Unit option under Inventory and Asset Stock detail page as shown below:
You can also track cost price and total cost from the side navigation menu, choose Items -> Inventory/Asset Stock -> More -> Stock history.
For Inventory, the stock history details quantity, cost per unit and total cost for consumed or sold Inventories.
For Asset Stock, the stock history details quantity, cost per unit and total cost for retired, Check-in or Check-out stocks.
Inventory Valuation Reports
We have also added reports for Inventory Valuation. From the side Navigation Menu go to Reports → Asset Stock/Inventory Reports → Asset Stock/Inventory Value.
You can also see the Line Items cost and costing method in Custom reports -> Line Items Reports. It provides data on Line Items’ unit cost price, total cost and valuation method used to calculate these costs.
EZRentOut, a cloud-based equipment rental software can help. EZRentOut offers companies in numerous industries seamless rental management along with a host of other features. You can integrate your website with our EZR plug to keep track of all your rental Assets and operations. Try us out today!