Valuation methodologies

 Weighted Average

Weighted average is, perhaps, the easiest of the valuation methodologies. You have no variances to analyze, only variation.

As the title implies, weighted average costing averages the purchase price of products and absorbs any price variation into your P&L through Cost of Goods Sold.

 Standard Cost

In Standard Cost, you establish a standard that you want to value your inventory at.  This may be the initial PO price, a vendor quote, or an estimate based upon industry or process knowledge.

With standard costs, also come variances that must be analyzed for the system to be effective. 

There are Purchase Price Variances (PPV) which are differences between your purchase price and your standard price.

There are Closed Work Order (CWO) variances that are the difference between your standard cost and the actual cost to produce a given product.

There are also Labor Variances, Factory Burden Variances, and Material Burden Variances that, like those already mentioned, are differences between the standard and the actual cost to produce a product.

Many company use the standard system as target costing and then manage to the variances.

 Specific Identification

Specific Identification is probably the most data-intensive method.  Specific identification requires you to serialize every piece of inventory.  While this may be appropriate for tracking blades for a Sikorsky helicopter, it’s definitely inappropriate for producing millions of homogenous, low-cost items.

 FIFO

First-In-First-Out tracks inventory as being used in the same order in which it was purchased, and is probably the way in which most companies consume inventory. 

LIFO

Last-In-First-Out is similar to FIFO, but considers the most recent purchase as the first one to be consumed.