Inventory valuation

What is inventory valuation?

Inventory valuation is the process of determining the value of your inventory. It's done by comparing your inventory to its replacement cost and determining how much it would cost to replace everything in your store at once.

This information can be used for many things, including calculating gross profit or loss on an item (if you know what you paid for it), figuring out whether or not something should be restocked based on its current selling price, or even providing insight into whether or not an item needs special attention because it's been sitting on shelves too long without being used.

How do you calculate inventory value?

There are three main ways to calculate inventory value:

1. Cost of goods sold method. This is a simple calculation that takes the total cost of an item, subtracts any discounts, and returns, then divides by your sales volume. The result is usually the most accurate way to determine your company's true investment in inventory.
2. Retail inventory method. This is similar to the cost of goods sold method in that it calculates how much money you spent on each product. Instead of dividing it by sales volume as in COGS calculations, retailers use this formula: retail price x average number sold = retail value per unit (RVPU). The RVPU can help determine whether or not certain items need special attention.
3. Average cost method (AC). This approach factors in both purchase price and depreciation expenses when calculating an item's value on hand at any given time throughout its lifespan, therefore AC values will always be higher than other methods because they include these additional costs into their calculations.

Why is inventory valuation tracked?

Inventory valuation is tracked for many reasons, but the most important reason (for maintenance teams) is so that you can make decisions about what to use and when or for retailers it would be when to sell.

What affects inventory value?

Inventory value is an important consideration for any business, but several factors can contribute to its value, including:

• Shelf life: How long a piece of inventory has been sitting on a shelf. Certain parts, for example, can become obsolete as machinery is updated.
• Environmental factors: Certain environmental factors can affect your inventory. For example, if your parts are sitting out in the open in very dusty or dirty environments it can affect the integrity of the part.
• Demand: If the demand for a particular maintenance part increase, the value of its inventory will increase as well. This is because there will be more customers looking to buy the part, which can drive up the price.
• Supply: The supply of maintenance parts can also impact their inventory value. If the supply is low, the value of the inventory will increase because it becomes more difficult to obtain the part.
• Lead time: The lead time, or the amount of time it takes to receive an order, can impact the inventory value. If the lead time is long, it may be necessary to keep more inventory on hand to ensure that there is enough stock available when needed.