Stock valuation

[david4167]

Hi All,
Hopefully, I can get some advice on this as I'm struggling a little.

What would you include in stock a value? Is it just Raw materials + Direct labour or do you also add in all associated overhead costs from production?
If just Raw materials + DL would you add the associated overheads (fixed & Variable) on to the COS on the P&L or show them separately?

thanks and look forward to hearing from you!!

 

[The Online Accountants]

The value of stock includes all the costs of bringing that item to it's present location and condition eg. cost of purchase, cost of conversion (direct labour and production overhead). Stock value is shown in the cost of sales and overheads further down in the profit and loss. Stock is also valued at the lower of cost and net realisable value so consider whether any stock might need writing down in value.

 

[david4167]

Thanks for the reply.
If all production overheads are therefore in the stock value and shown in the COS on the P&L - presuming the P&L should only show other Overheads outside of Production i.e Sales & Marketing, distribution etc?

 

[pentel]

The valuation of stock can be a very difficult area. The lower of cost and net realisable value covers a multitude of sins.

Do you want to give the impression of high profits or hide a loss? Throw everything at the stock, every overhead and possible cost item at it, this can turn a loss making company into a profitable one!

Do you want to minimise tax on a profitable company? Then include only the raw materials and make a deduction for possible obsolescence, shrinkage, etc. etc..

This is an area where 1+1 can equal many different figures.

I would decide on a course of action, document it and use the same definition and method each time you calculate a stock figure, but beware the only person you may be fooling could be yourself.