Depending on their specific production and business characteristics, each enterprise applies a suitable inventory valuation method. Businesses may choose a method that facilitates their calculation process, provided they strictly adhere to the accounting principle of consistency.
Currently, according to Circular 200 (Circular No. 200/2014/TT-BTC), there are three common inventory valuation methods:
- Specific Identification Method
- Weighted Average Method (after each purchase or at the end of the period)
- First-In, First-Out (FIFO) Method
Whichever inventory valuation method an enterprise chooses, it must ensure consistency throughout the entire accounting period (financial year).
1. Weighted Average Method
This is a commonly used method among enterprises. Under this method, the value of each type of inventory is calculated based on the average value of the beginning inventory and the value of inventory purchased or produced during the period. The average value can be calculated periodically or after each shipment received, depending on the specific conditions of the enterprise.
1.1. Periodic Weighted Average (End of Period)
This method is suitable for enterprises with few locations but a high frequency of inventory inflows and outflows. Based on the actual cost of the beginning inventory, the accountant determines the average cost of a unit of product or merchandise.
Under this method, the cost of goods issued is only calculated at the end of the period. Depending on the enterprise’s inventory reserve period, the inventory accountant calculates the average unit cost based on the purchase price and the quantity of beginning inventory and purchases during the period:
- Advantages: Simple and easy to execute, requiring calculation only once at the end of the period.
- Disadvantages: Accuracy is not highly precise. Moreover, concentrating calculation tasks at the end of the month affects the progress of other accounting segments. Additionally, this method fails to meet the requirement for timely accounting information at the exact moment a transaction occurs.
1.2. Perpetual Weighted Average (Moving Average/After Each Purchase)
After each receipt of products, materials, or merchandise, the accountant must recalculate the actual value of the inventory and the new average unit cost. The average unit cost is calculated using a specific formula.
- Advantages: This method overcomes the drawbacks of the previous method; it is both accurate and continuously updated.
- Disadvantages: It is labor-intensive and requires multiple calculations. Therefore, this method is typically applied in enterprises with a limited variety of inventory and low volumes of inflows and outflows.
2. First-In, First-Out (FIFO) Method
The FIFO method is based on the assumption that inventory items purchased or produced first are issued first. Consequently, the value of the ending inventory represents the items purchased or produced nearest to the end of the period.
Under this method, the cost of goods issued is calculated based on the prices of the earliest inventory batches, while the value of the ending inventory is calculated based on the prices of the most recent inventory batches.
This method is suitable when prices are stable or trending downward. It is frequently used by businesses dealing in pharmaceuticals, cosmetics, etc.
- Advantages: The cost of goods issued can be determined immediately upon each issuance, ensuring the timely provision of data for subsequent accounting entries and management purposes. The value of ending inventory closely reflects current market prices. Therefore, the inventory figure on the financial statements is more realistic.
- Disadvantages: Current revenues are not matched with current costs. Under this method, current revenue is generated against the cost of products, materials, and merchandise acquired a long time ago. Additionally, if there is a large variety of items with continuous inflows and outflows, accounting costs and the overall workload will increase significantly.
Note: Each inventory valuation method has its own specific advantages and disadvantages. The accuracy and reliability of each method depend on management requirements, staff competence, and the enterprise’s computational tools and information processing systems. It also depends on storage requirements, the complexity of inventory types and specifications, and the fluctuation of materials and merchandise within the enterprise.
3. Specific Identification Method
The specific identification method is based on the actual cost of each specific item purchased or produced. Therefore, it is only applicable to enterprises with a small number of items, or items that are stable and uniquely identifiable.
Under this method, the unit cost of the specific batch from which the product, material, or merchandise was originally received is used to calculate the cost of goods issued.
- Advantages: This is the optimal method as it adheres strictly to the matching principle in accounting, matching actual costs with actual revenues. The cost of goods sold matches the revenue it generates, and the inventory is accurately reflected at its actual, true value.
- Disadvantages: Applying this method requires strict conditions. Only businesses dealing with a limited variety of items, high-value inventory, stable products, and clearly identifiable inventory items can implement it. For enterprises with a wide variety of goods, this method is impractical.
