Tools & Tips

Calculate inventory costs? 10 Key steps

Calculating the cost of inventory is essential for effective Supply Chain management. Here are some tips to help you calculate inventory costs:

1. Determine the valuation method: Choose an inventory valuation method that aligns with your business needs and accounting practices. The most common methods are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average cost. Each method has its own implications on cost calculations.

2. Track inventory purchases: Keep a detailed record of all inventory purchases, including quantities, unit costs, and dates of acquisition. This information will be crucial for calculating the cost of inventory.

3. Include transportation and handling costs: Consider additional costs associated with acquiring and transporting inventory, such as shipping fees, customs duties, or handling charges. These costs should be included in the total inventory cost.

4. Account for discounts or rebates: If you receive discounts or rebates from suppliers, adjust the cost of inventory accordingly. Deduct the discounts or rebates from the purchase cost to reflect the actual amount paid for the inventory.

5. Factor in production costs: For items produced internally, consider the direct costs involved in the production process. This includes raw materials, labor costs, overhead expenses, and any other relevant production costs.

6. Consider overhead allocation: Allocate a portion of overhead expenses, such as rent, utilities, or administrative costs, to the inventory. This can be done based on factors like floor space utilization or labor hours spent on inventory-related activities.

7. Calculate the total cost of inventory: Sum up the costs incurred for each inventory item to determine the total cost of inventory. This includes the purchase cost, transportation costs, handling costs, discounts/rebates, production costs, and allocated overhead expenses.

8. Adjust for shrinkage or obsolescence: Consider any shrinkage (loss or theft) or obsolescence of inventory when calculating costs. Adjust the inventory value to account for any unusable or expired items.

9. Regularly update inventory costs: Review and update inventory costs periodically to reflect any changes in purchase prices, production costs, or other relevant factors. This ensures that your inventory valuation remains accurate and up to date.

10. Use inventory management software: Utilize inventory management software or systems to automate and streamline the cost calculation process. These tools can help track inventory, update costs, and generate reports for better inventory cost management.