In the first part of our examination of Inventory Valuation methods for manufacturing and distribution, we discussed the basics of the costing practice and outlined some common methods that you can employ. Now, let’s take a deeper dive into industry-specific considerations that will help you identify the best inventory valuation methods for your organization.

Key Inventory Valuation Methods by Industry

The most pragmatic way to choose an inventory valuation strategy for your business is to consult with a CPA firm or experienced cost accountant. However, here are a few factors that you must consider if you plan to handle your inventory valuation processes entirely in-house:

Make-to-Stock Manufacturers

As a make-to-stock (MTS) manufacturer, your organization produces a standard line of stock on an indefinite basis, which actually simplifies the process of choosing an inventory valuation method, as your pricing and stock expenditures are likely very consistent throughout any given year.

Commonly, MTS manufacturers use either the first in, first out (FIFO) approach or the weighted average cost (WAC) method. As is probably the case for your business, your stock is shipped out as soon as it is produced, and any inventory that is manufactured later is held in reserve to accommodate future orders. As such, the FIFO method can effectively provide your organization with very accurate inventory valuation data. 

Make-to-Order Manufacturers

Make-to-order (MTO) manufacturers strongly prefer specific inventory valuation methods, as they rarely produce the same item again. In this sector of manufacturing, tracking raw materials and components by serial number is a common practice, which makes using specific inventory valuation tactics more practical than they would be for MTS businesses that do not track all of their components or materials.

Even with that being said, however, there is no reason that your MTO facility cannot use an alternative inventory valuation strategy. Other strategies can provide timely and accurate inventory valuation information, provided that your calculations are being made with quality stock and costing data. 

Wholesale Distributors

FIFO and other average inventory valuation tactics are also popular among wholesale distributors. These simple but effective methods enable wholesale distributors to quickly and efficiently calculate inventory valuations. 

The one exception to that is any wholesale distribution company that handles perishable products. These products are tracked with lot numbers and can experience rapid price fluctuations throughout the year. Oftentimes, wholesale distributors that handle non-durable or perishable goods will use alternative costing methods to more accurately reflect these price fluctuations. 

Material Considerations

When deciding which inventory valuation method to implement, you should consider not only the type of manufacturing or distribution services you offer but also what materials you handle. FIFO valuations are likely more suitable methods if your facility deals with materials such as:

• Food
• Beverages
• Oil
• Chemicals
• Pharmaceuticals 
• Metals

On the other hand, if you manufacture or distribute durable goods, such as plastics, machinery, industrial items, or electronics, WAC valuation strategies may be more appropriate.  

Software Considerations

When exploring ERP software solutions that can modernize your inventory valuation and financial management processes, it is important to note that not all platforms use standard calculations. 

Lower-end ERP software and systems from the past often provide minimal cost support, which means that they can only accommodate a few basic methods. Conversely, a dynamic solution, such as Acumatica ERP software, can support all of the common, modern inventory valuation methods, as well as several more specialized approaches. 

Some of the inventory valuation methods that Acumatica ERP software can support include the following:

• Standard valuation
• Valuation histories
• Average valuation
• Specific valuation
• FIFO valuation
• Multiple methods
• Warehouse costing
• Disassembly (Valuation of disassembled components and materials)
• LIFO valuation
• Job cost
• And more

With Acumatica ERP software, you can examine costing and valuations using whichever method(s) provide(s) the most meaningful insights for your organization. In turn, you can use those insights to inform purchasing decisions and promote the long-term success of your business.

Implement Acumatica with Advanced Solutions & Consulting Co.

Advanced Solutions & Consulting Co. can help your organization simplify its inventory valuation processes by planning and overseeing the implementation of Acumatica ERP software. Our experienced team can seamlessly integrate your new software into your existing technology stack so that you can enjoy a strong return on investment and gain access to timely business insights. 

Learn more about this exciting opportunity by contacting Advanced Solutions & Consulting Co. and scheduling a demo of Acumatica ERP today.

Learn More: Principles of Inventory Valuation and Manufacturing Costing Strategies eBook

Our eBook, Principles of Inventory Valuation and Manufacturing Costing Strategies, looks at the advantages and disadvantages of inventory valuation and manufacturing costing options and how ERP applications factor into the equation. You will learn: 

• Fundamentals of inventory valuation and manufacturing costing.
• Different types of inventory valuation strategies.
• Various job costing methods.
• Considerations for choosing the best inventory valuation and manufacturing costing options.
• Valuation and costing requirements using a detailed ERP feature checklist.

Click here to download now.

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