In the 2023 budget, there is a mention of the valuation of inventory by the cost accountant. According to section 68 of the Income tax act, inventory valuation is done by a cost accountant. Section 2 of the cost and works accountants explain that a cost accountant is a person holding a certification of practice. The sub-section (2A) states that the assessing office instructs the assessor to get the valuation from the cost accountant. The amendments will take practical form in the assessment years 2023 to 2024. The financial year of 1st April 2023 starts with an additional report from the cost accountant for statutory audit. The blog brings to the table valuable information about inventory management.
What is inventory valuation?
The financial statements are prepared by the accountant employed inside the company. The chartered accountant prepares the auditor’s report. As per the latest amendment, the chartered accountant should attach the inventory valuation report from a cost accountant. Inventory valuation includes the unsold stock at the time of year-end calculation. The inventory value is essential to find out the turnover ratio. The company makes purchasing decisions by calculating the turnover ratio. The unsold items are from different quarters. The cost and market price are the two rates available for the valuation of inventory. Inventories are the business asset that goes for the future of the business. It has to be calculated using a common rate. The three methods followed for inventory calculation are the FIFO, weighted average cost and LIFO methods. FIFO stands for first in first out. LIFO stands for last in first out. The weighted average method uses the average cost per unit throughout the year. The financial goals and market fluctuation decide the adoption of the method for inventory valuation. The inventory value differs with cost, purchase price, and quantity of unsold items. The reasons for having high inventory value are listed below:
1. Inventories are part of current business assets.
2. Inventories attract investors and shareholders. The price rise and fall decide the method to be followed. To please the shareholders the company will follow FIFO during high prices and LIFO during low prices.
3. If the business owner wants a bank loan or funding, the inventory value is important. It plays a vital role. It has to be high. The inventories and assets act as collateral. So, the high value increases the value of the business.
4. For reducing tax liability, entrepreneurs prefer the LIFO method. The LIFO method will reduce the inventory value. The profit margin also differs if the inventory value is less.
5. Inventories are the monetary values that help business goals. The business plan and market conditions decide the inventory valuation technique.
Why inventory valuation is important?
The manufacturing sector, retail and food industries give more importance to inventory management. The logistics manager’s job is to communicate with the suppliers, Transportation Companies, and retailers. And he checks inventory status, export, import, demand and market trends. Inventory management helps with the flow of goods, supply chain networks, and decision-making. Inventory management is part of logistics management. Logistic management includes warehouse management, quality maintenance and the timely supply of goods. Logistic managers calculate the inventory value and track the quality of the goods. They are responsible if the product is spoilt. Inventory management is the functional and financial function. The auditors, cost accountants and logistic managers check the inventory management. Inventory management has the following benefits:
1. It records the supply and prices. It educates about cost management and price fluctuation.
2. In a customer-centric business, tracking changes help in managing quality and customer satisfaction.
3. Companies with efficient supply chain networks manage the risk connected to shortage and overstock.
4. Inventory management is related to current assets and sales. It helps to manage the business and profit margin.
5. Inventory management protects the goods from theft. It provides continuous tracking and security to the goods.
6. Inventory management reduces the accumulation of unused stocks.
7. Inventory management manages the seasonal changes and administration throughout the year.
8. Inventory management increases resource efficiency.
9. Inventory management enhances sales strategies.
10. Inventory management has different stages. They are warehouse management, storage details, inventory levels, customer order, customer packaging, and delivery. Each stage of inventory management has an operational and financial impact.
Difference between LIFO and FIFO methods?
Under the LIFO method, the stock in hand shows the earliest consignment. Under the FIFO method, the stock in hand shows the latest consignment. In the LIFO method, the current market price is seen in the calculation of the cost of goods. In the FIFO method, the unsold stock shows the market price. LIFO is not recommended by the international financial reporting framework. FIFO has no such cases. The record maintenance is minimum in the case of FIFO. The record maintenance is high in the case of LIFO.
Industries using LIFO and FIFO:
Automobile, petroleum-based production companies and pharmaceutical companies use the LIFO method. Grocery shops, the retail market, and the food industry use the FIFO method.
How does an engineering student do inventory valuation?
Mechanical engineers work as inventory managers and designers. In the supply chain management network, inventory management is a specialised skill.
Benefits of the CMA course for an engineering student:
Mechanical engineers work as inventory managers and designers. CMA course is helpful for an engineer in the following ways:
1. Help for understanding the price fluctuations.
2. Help with decision-making in terms of cost and inventory process.
3. Understand the concepts in reporting and accounting systems.
4. Understand the basics of project management.
5. Understand the cost associated with raw materials, administration, services and products.
6. CMA course has global value. By doing the CMA course, engineers get foreign opportunities.
7. After engineering, students get an exemption in some CMA papers.
8. The engineers should clear only the intermediate and final levels. After getting practical experience, it is easy to clear CMA subjects.
Conclusion:
Inventory management is a crucial part of the manufacturing sector and industries with high demand. Inventory management enhances customer satisfaction and product quality. The companies benefit from long-term growth by involving the cost accountants in inventory valuation.
