Adjustments for Departures from the Costing Method Used--Inventory
Valuation:
The problem of year end inventory valuation
is primarily a question of the materials cost consumed in products
manufactured and sold to customers and the cost assignable to goods in
inventory ready to move into production and available for sales the next
fiscal period. This question is important, because the
materials ledger card
would have to be adjusted for any change in units prices if there is a
departure from the commonly used costing method. Since the new unit price
could not be made available to the materials ledger clerk for some time
after the year end inventory was taken and priced, the detailed task of
changing hundreds and even thousands of costs would be cumbersome and time
consuming. Therefore, instead of adjusting the ledger cards, companies may
create an inventory valuation account, as illustrated by the following
journal entry:
| Cost of goods sold or
factory overhead control |
xxx |
Dr |
| |
Materials--Allowance
for inventory decline to market |
xxx Cr |
|
Inventory
adjustment - Lower of cost or market |
In the subsequent fiscal period,
materials--allowance for inventory decline to market is closed out to
cost
of goods sold to the extent necessary to bring the materials consumed that
are still carried at a higher cost to the desirable lower cost level.
Use of the valuation account retains the cost
of the inventory and at the same time reduces the materials inventory for
statement purposes to the desired
cost or market, whichever is lower valuation without disturbing the
materials ledger cards. The preceding entry should result in the following
balance sheet presentation:
Material, at cost
Less allowance for inventory decline to market
Materials, at cost or
market, whichever is lower |
$100,000
5,000
-------- |
$95,000 |
The net charge to
cost of goods sold may be
shown in the cost of goods sold statement or deducted from the ending
inventory at cost, thus increasing the cost of materials used. Whenever the
lower of cost or market procedure is applied to each inventory item and the
adjustment of
materials ledger cards to a lower market figure is not
burdensome and the data are available early in the next year, the adjustment
should be accomplished by dating the entry with the last day of the fiscal
period just ended and entering in the balance section the units on hand at
the unit price determined for inventory purposes. In such a case, the credit
portion of the adjusting entry would be to the materials account.
|
