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Homework answers / question archive / How to value inventory
How to value inventory. I wanted to provide an example of how we do this at my workplace. We have our payments made for the raw materials which get coded to raw materials inventory. We then start work on the items and there is labor and overhead added based upon the stage that it is in. It eventually is finished and becomes finished goods. So how do we come up with these costs?
We take our inventory at the end of each quarter and we know what is raw material and this is recorded on our balance sheet as inventory at its purchase price.
We might have some WIP and/or finished goods. We have stages such as the following for the iron process:
Shafted
Shafted and gripped
Loft and Lie
Finished Club
For this example, a shafted club has the cost of the head and shaft as well as some labor and some overhead. A finished club would be worth more since it has more labor and overhead. We take our overhead costs at the end of each year and divide it by the number of clubs produced to get our new overhead rate. Each product is separate (irons, metal woods, putters etc.) so this is easy to do.
Please let me know if you agree or disagree
1. First of all List the Expenses:
Make a comprehensive list of indirect business expenses including items like rent, taxes, utilities, office equipment, factory maintenance, etc. These are your overhead costs. Direct expenses related to the production of goods and services, such as labor and raw materials, are not included in overhead costs. So, please exclude those costs. While categorizing the direct and overhead costs, remember that some items cannot be attributed to a specific category. Some business expenses might be overhead costs for others but a direct expense for your business. So, you have to categorize those expenses and decide whether those expenses will be added to your overhead costs.
2. Add the overhead costs:
Total the monthly overhead costs to calculate the aggregate overhead cost. This is the amount of money that you need for running your business.
3. Calculate the overhead rate:
The overhead rate or the overhead percentage is the amount your business spends on making a product. To calculate the overhead rate, simply divide the indirect costs by the direct costs and multiply by 100.
The less your overhead cost rate is the more profit your company will make.
if you want to know the difference then just calculate the overhead cost rate as per your current formula vs. the formula which i have provided. And choose the one in which the overhead cost rate is less...
