How to calculate inventory? Explaining the types and how to use the calculation results
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Inventory is the process of checking the stock of goods and raw materials held by a company or sole proprietor and checking their quality and condition.
When an inventory is conducted, the actual inventory quantity is compared with the inventory quantity recorded in the ledger. This allows for proper inventory management by identifying discrepancies and shortages. Inventory calculations are important in such an inventory.
How do I calculate inventory?
"This is my first fiscal year, and I'm worried about whether I can calculate accurately..."
In this article, we will explain the correct way to calculate inventory to help alleviate any concerns you may have about it. We will also introduce the preparations you should make before taking an inventory and what you can do with the results of your inventory, so please use this as a reference.
Types of inventory and calculation methods
There are many different types of inventory, from managing inventory stored in a company's warehouse to managing inventory held by factories and retail stores.
The calculation method differs depending on the type of inventory, so we will explain each type of inventory. Master the calculation method to correctly calculate inventory and company profits and smoothly proceed with closing the books.
kinds
Physical Inventory
Physical inventory is an inventory where the person in charge actually counts the quantity of stock on-site. You can directly check the ending inventory amount and the quality status of the stock.
Physical inventory counts are generally conducted several times a year, such as once at the end of the fiscal year. Since personnel must stop their daily work to carry out the work, a single physical inventory count may take one to several days.
Physical inventory is carried out in two ways:
Tag Method
This method involves attaching numbered shelf tags to each display shelf in order to check the current stock level.
You can visually check the actual products and attach shelf tags to each one, so you can check all your inventory.
List Method
This method involves comparing the amount of inventory listed in a system-generated inventory list with the actual amount of inventory.
The inventory quantity can be calculated by subtracting the number of items sold from the number of items purchased, so you can check the amount of inventory consumed.
Since there is no need to attach shelf labels, inventory can be checked in less time than with the tag method. However, there is a disadvantage in that it is easy to make counting mistakes, so care must be taken.
When adopting physical inventory, check your inventory management environment and choose the method that is best suited to your company.
If there are only a few types of products or the quantities handled are within a range that can be counted manually, the tag method is recommended for the accuracy of counting.
If there are many types and quantities, choose the list format for efficiency.
Book Inventory
Book inventory is a method of checking the number of products in stock by calculating them on a ledger.
Whenever inventory is moved in or out, the number and type of items are recorded in dedicated ledgers such as inventory management sheets, material ledgers, and inventory ledgers.
We recommend using an inventory management system, a business efficiency tool, when checking inventory levels, as this will lead to smoother inventory management and reduced labor costs.
Unlike physical inventory, inventory can be carried out without interrupting product transactions, so you can conduct inventory without worrying about a drop in sales or profits.
However, since this is a bookkeeping method, there is a concern that it may not reflect the actual inventory figures.
Another disadvantage is that you cannot directly visually check the degree of dirt or quality of the inventory.
To ensure accuracy and quality of your counts, consider using a combination of book counts and physical counts.
In general, companies conduct this on a weekly or monthly basis rather than annually. However, since it must be included in financial statements, some companies conduct it at the end of the fiscal year.
How to calculate inventory
Inventory can be calculated by multiplying the physical inventory quantity by the purchase price (cost of sales).
Inventory refers to the stock of goods and raw materials held within a company.
At the time of closing the books, the total assets of the inventory held are calculated and recorded as inventory in the balance sheet, which is one of the documents to be submitted.
In accounting, calculating the book value of inventory is referred to as "valuing inventory."
The valuation of inventory is determined by the purchase price, which is the cost of goods purchased from business partners.
Cost includes not only the price of the product itself, but also the cost of materials and transportation required for the development and manufacturing of our products, as well as work in progress that is in the process of becoming a product.
Inventory is calculated by multiplying the quantity in stock by the purchase price.
However, if the unit price of goods, material costs, and transportation costs fluctuate due to social conditions or weather, the inventory at the time of purchase may differ from the current inventory, so caution is required.
Taking into account the possibility that inventory may change over time, there are various methods for valuing inventory depending on how the purchase price is set.
Inventory valuation methods can be broadly divided into two categories: the cost method and the lower of cost or market method.
◇Cost method: A method of calculating inventory assets using the cost at the time of purchasing inventory. ◇Lower of cost or market method: A method of calculating inventory assets by comparing the cost at the time of purchasing inventory with the current cost and adopting the lower of the two as the purchase price.
Furthermore, the cost method is classified into the following six types depending on the method of calculating the purchase price.
1) Individual Law
This method applies to all inventory assets and calculates inventory based on the original purchase cost.
Example) Product A is purchased for 3,000 yen, product B for 2,500 yen, and product C for 4,000 yen, and only product A remains in stock at the end of the period.
⇒ The assessed value of the inventory items is recorded as 3,000 yen.
Since inventory for each product must be managed individually, inventory management can become complicated for businesses with a large variety of products.
This calculation method is recommended when there are a limited number of products, such as jewelry, art, or real estate.
②First-in, first-out method
This method calculates the inventory amount at the end of the period, assuming that products purchased first are withdrawn in the order they were purchased.
If two products with different purchase prices are released at the same time, the first-in, first-out method calculates the cost price at the time of first purchase.
The advantage of this method is that it makes accounting easier because the cost price that changes each time you purchase something is not included in the calculation. On the other hand, the disadvantage is that it is difficult to reflect the actual price fluctuations of the product.
③ Total average method
This is a calculation method that calculates the average cost per unit by dividing the total amount of goods purchased during the period and the inventory value at the beginning of the period by the total quantity.
The disadvantage is that the total amount and total quantity are required, so the cost cannot be calculated until the end of the period.
④Moving average method
This is a method of calculating the unit price each time an item is purchased. It can be calculated by dividing the total acquisition cost of the items purchased up to that point and the acquisition cost of the newly purchased items by the total number of items in stock.
The moving average method has the advantage of easily reflecting actual price fluctuations in accounting. However, it has the disadvantage of requiring you to calculate the cost price whenever you purchase something, which can be time-consuming for accounting purposes.
⑤Last purchase cost method
This method treats the unit price of goods purchased closest to the end of the period as the unit price of inventory at the end of the period.
The advantage is that accounting work is easier because there is no need to record the unit price each time you purchase goods.
⑥Retail price method
This method is suitable for industries such as retail, where product management is based on selling price.
The formula for calculating total inventory is the total planned normal sales price of inventory at the end of the period multiplied by the cost rate (1 - sales markup rate).
Preparations required for inventory
Once you understand the calculation method, it's time to actually start taking inventory. However, there are some necessary preparations to make before you can start taking inventory.
If you understand what you need to prepare in advance, you can properly carry out inventory. We will explain the purpose and specific details of inventory preparation in a step-by-step manner.
Decide who is responsible
The first step in preparation is to decide who will be responsible for inventory operations.
The person in charge of inventory is generally the head of each department. The ideal person for this position is someone with experience in inventory taking and knowledge of inventory storage locations and products.
If you don't know the layout of the warehouse where inventory is stored or the appropriate storage environment for the products, you will not be able to manage inventory or understand its status, making you unsuitable to be a manager.
The person in charge of inventory should be instructed to share accurate inventory information with the members who will be conducting the inventory together. Creating an information sharing system will ensure a smooth inventory.
Assign a person in charge
When taking inventory, the inventory manager must assign tasks to each employee.
Inventory taking usually takes time, so make sure you have plenty of people available to assign the work.
Since each person has different tools, such as accounting software, and is good at different tasks, it is ideal to assign roles based on each person's abilities.
Adopting an electronic bookkeeping app or system can automate calculations and improve the productivity of inventory work, thereby reducing the time required for the task.
Decide the date and time for inventory
When conducting an inventory, decide on a date and time.
By deciding on a time period for your work and setting both a start and end time before you begin, you will be able to work more efficiently because you will be aware of the time you need to finish the work.
However, if the amount of work is too great for the set time period, it may not be possible to complete the work as planned, which could lead to a decrease in team members' motivation.
The key is to consider the balance between the amount of time you work and the work content, and set appropriate goals. Create a realistic inventory schedule so that you can complete the work within the allotted time.
What you can do by utilizing the results of inventory
Correctly calculated inventory figures not only allow you to grasp the actual situation, but can also be used to compare inventory and improve the efficiency of accounting work.
We will introduce three things you can do by utilizing the results of your inventory, so please use them to run your business effectively and efficiently.
You can compare quantities
By comparing the inventory quantity calculated during inventory with the quantity recorded in the ledger, you can accurately grasp the actual situation.
If there is an input error in the processing of purchasing documents or if inventory management rules are not strictly followed, the physical inventory count and the book inventory count may differ. The discrepancy between the physical inventory count and the book inventory count is called "inventory shrinkage."
The larger the inventory shrinkage value, the more it will lead to loss of profits and deterioration of cash flow, so regular checks are necessary. If there are discrepancies between the physical inventory and the book inventory, please adjust the books accordingly.
It is recommended that you set an update date or accounting date as the basis for inventory counting, and decide on a date for your company to count inventory so that you can check it regularly. Generally, the update date is used to record the number of inventory items on the day the transaction was actually carried out, and the accounting date is used to record the number of inventory items on the day the supplier shipped the purchased goods.
In addition, when the market value of defective inventory is lower than the cost price due to deterioration over time, the difference is called an "inventory valuation loss." In this case, it must be recorded as an expense and included in accounting.
To prevent recurrence, measures such as introducing an inventory management system and reviewing inventory management rules are necessary.
Determine inventory
Through inventory taking, the closing inventory amount, which is the value of goods in stock at the end of the period, is calculated, and the value of inventory assets can be determined.
Inventory is the stock of goods held by a company. Examples include raw materials, products in the process of being manufactured or completed, and consumables purchased for the company's own use.
By using accounting items that correspond to the type of inventory and recording the determined amount on the balance sheet, it is possible to understand the company's financial situation at that time.
By conducting regular inventories at regular intervals, you can consider and analyze your company's assets and liabilities each time, which can lead to improved business efficiency and cost reduction.
lock in profits
For accounting purposes, a company needs to show what results it has achieved, so inventory allows it to determine profits, which represent the company's results.
Gross profit is the total sales amount minus the cost of goods sold. Profits are generated by selling goods, but not all of the goods purchased are sold.
To accurately calculate profits, manage inventory properly and understand the difference between the cost of purchasing goods and sales.
Use an electronic system to calculate inventory accurately and quickly
Accurate inventory calculations are essential for properly managing product inventory and determining your company's profits and inventory.
To calculate the figures correctly, you need to understand the types of inventory, how to actually calculate them, and the necessary advance preparations.
Use the information in this article to correctly calculate your inventory and use it to improve the efficiency of your company's inventory management and business promotion.
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