Stock valuation for trading companies, worked through one item.

The methods

All four answer the same question: what did the stock you sold cost, and what is the stock you still hold worth — and all four must agree that cost of goods sold plus closing stock equals what you actually paid in. They disagree on how they split that total between the two.

FIFO (first in, first out).

The oldest cost on the shelf is the first cost that leaves it. Closing stock is valued at your most recent purchase prices.

LIFO (last in, first out).

The newest cost on the shelf is the first cost that leaves it. Closing stock is valued at your oldest purchase prices, which can be well out of date.

Weighted average.

Every unit in stock is blended into one average cost, recalculated as new purchases arrive. A sale and a closing balance both use the same average.

Standard cost.

A cost is fixed in advance for the item, independent of what you actually paid. The difference between standard and actual is booked separately as a variance, not folded into the stock value.

A worked example: 50 kg rice

One item, one month. Opening stock plus two purchases, then a sale of 300 bags before the count.

300 bags are sold during the month, leaving 150 bags in the count. Cost of goods sold plus closing stock must total the GH₵181,000.00 above, under every method; only the split changes.

Weighted average carries the cost to four decimal places (GH₵181,000.00 ÷ 450 bags = GH₵402.2222) before rounding the line totals back to the cedi — round the average itself too early and the two halves stop reconciling to GH₵181,000.00. Standard cost is the odd one out: it does not use any of the three actual purchase prices for the stock value at all, and the GH₵1,000.00 gap between what you actually paid (GH₵181,000.00 for 450 bags) and what the standard says you should have paid (450×GH₵400.00 = GH₵180,000.00) is booked to a separate variance account rather than sitting inside the stock figure.

Which method suits a distributor

FIFO suits an item where the physical stock actually rotates oldest-first

: food, anything with a shelf life, anything you would not want to find at the back of the depot for a year. It also tends to track replacement cost most closely in a period of rising prices, since closing stock sits at the newest purchase price.

LIFO suits very little in a distribution business

and is more common in reporting regimes that no longer allow it. In a rising-price month it understates closing stock against replacement cost, which is the opposite of what a lender reading your balance sheet wants to see.

Weighted average suits a bulk, fungible commodity

— rice, cement, fuel — where one bag is indistinguishable from another and tracking which specific batch left first is not meaningful. It also smooths out a single unusually cheap or expensive purchase rather than letting it dominate the next sale's cost.

Standard cost suits a business that wants stable, predictable costing through the month

and is willing to review a variance report afterwards, rather than have every purchase-price swing move the stock value immediately. It is more work to set up and keep current than the other three.

Landed cost and transfers between depots

Landed cost changes what "cost per bag" means before any of the four methods run.

Freight, import duty and clearing charges added on top of the supplier's invoice price all belong in the cost of the stock, not in a separate expense line, if the valuation is to mean anything. Which of those charges your purchase process folds into the item cost, and which stay as period expenses, is a policy decision your auditor will ask about, and it needs to be applied the same way every month.

In Factura Financials, landed cost goes on the purchase voucher itself.

Freight, duty and clearing charges are entered as Additional Cost on the Purchase voucher, so they become part of the cost of the items received rather than a separate expense line — and that loaded cost is the figure the valuation methods above work from. Charges booked elsewhere instead need an adjustment before the count, or the valuation is understated.

A transfer between depots does not change the company's total stock value

: it moves quantity and cost from one location to another. Whichever method you use, the cost that leaves the sending depot is the cost that arrives at the receiving one; only the location changes, not the figure. In Factura Financials a transfer is a single document, so what left one depot and what arrived at the other are two sides of the same entry rather than two separately keyed movements, see Inventory →

What the auditor asks for

1. Which method, and has it changedThe costing method used for each item, and confirmation it is the same method as the prior period. A method change mid-year needs a stated reason and a disclosed effect on the numbers.
2. The count that ties to the ledgerA physical count sheet, dated at or near the period end, reconciled to the system quantity for each item — with the differences explained rather than adjusted away.
3. The valuation working as well as the totalEnough detail to recompute the closing value from the quantities and the costing method, not a single number with no way to check it.
4. Evidence of a write-down where cost exceeds what the stock will realiseSlow-moving or damaged stock carried above what it can actually be sold for is the standard exception an auditor looks for, regardless of which of the four methods produced the original cost.

Which of these Factura Financials actually runs

The item master offers more valuation options than the calculation engine implements. Four are wired in and produce a figure; the rest are declared but do not run.

FIFO, LIFO, weighted average and standard costing are wired into the engine

and each recomputes the item's value on save, when an invoice or a point-of-sale line posts — the value you read is the value the last document left behind. See Inventory →

Stick to those four methods.

The item master's list of costing methods is longer than the four the engine calculates, so choose FIFO, LIFO, weighted average or standard costing rather than any other entry on the list.

Questions distributors ask