Though not a valuation method, transfer pricing is a technique that organizations use to assist in aggregate inventory management, especially when looking at, and adjusting margins. Formally defined transfer pricing is a practice used in accounting to transfer the cost of goods or services from one area of a business to another.
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A problem is a deviation or gap between what is actually happening and what should be happening. A problem can also be defined as any customer need that is not met on-time in the right amount and in acceptable quality (according to the customer).
Standard costs are actually estimates of the actual costs in a company’s production process. These estimates are used because knowing the exact costs would be impossible until the process is performed. Another way to think of standard costs is as the target or budgeted costs involved in a businesses processes. Standard costs usually include: material costs, labor costs and overhead costs.
The specific identification inventory valuation method is used to track each and every item in your inventory individually. This includes the time it enters the inventory until the time it leaves it. Let’s not get confused here, specific identification is different from LIFO and FIFO. LIFO and FIFO groups pieces of inventory together based on when they were purchased and how much they cost, while specific identification identifies and tracks every piece of inventory individually. The specific inventory method tags or marks each item with its purchase cost and any additional costs that are incurred in the transformation process until it is sold.
LIFO is a method used for cost flow assumption purposes in the cost of goods sold calculation. The LIFO method of inventory valuation assumes the most recent products or, "last in" products of a company’s inventory have been used first.
First in First out is a method used in inventory valuation for accounting purposes. The method advocates the practice of using the oldest inventory item first, hence the name "first in" "first out." The principle is also applicable in maintaining precise sequence during and through the production of items because it ensures that the first part into a process or inventory location is also the first part to be used. The FIFO lane is one method of controlling and regulating a pull system that is between two disconnected (decoupled) processes.
The average cost method is an inventory valuation method used in accounting to calculate the value of inventory. Put very simply it is the cost of all inventory items summed and averaged.
Inventory valuation can make or break a company. It is absolutely essential that the valuation method you choose aligns with the needs of your specific business and the industry it serves. In this post we will introduce one valuation type known as actual cost valuation.
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