Stock, WIP etc

Stock, WIP etc

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I know that this is a rather wide ranging question, but I would appreciate some pointers in the right direction. How do others deal with stock, WIP and finished goods on a monthly management reporting basis. I am able to know the value of WIP and finished goods (lower of cost and net realisable value) but if I am setting up accounting records to deal with this, what should I consider and does anyone have any best practice suggestions.

Thanks for your help, whoever you are!
andrew randall

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By Accounting WEB
17th Oct 2001 21:34

Valuing stock & WIP
Very basically, monthly management accounts (as opposed to financial accounts) should be presented in the way that is most useful to those who need to act on them (ie; managers) and therefore there are many ways of valuing stock/WIP, according to the industry involved.
However, as a general rule, what one is trying to do with "stocks & WIP" is to exclude from the monthly "Cost of Sales", that part of the materials, labour and overhead cost which has not yet been converted into sales revenue.
Therefore, whilst raw materials can be valued at lesser of cost/NRV, valuation of work in progress and finished goods should include direct material, labour, and overheads (o/h's calculated at a rate per unit or hour, if using an absorption-based costing system, or a rate per "activity" if using an activity based costing system).
The above may already be obvious to you, but many bookkeepers see "stock" as simply a materials cost, whereas if you have 20,000 units of a finished good in stock, each of which has taken 2 hours production labour, paid at an average rate of £5/hr, then you have £200K of Wages as an expense in the management accounts, relating to sales in a future period. Therefore don't forget to include labour costs and a proportion of overheads in WIP/Finished Goods.
Now then, how to value the materials? If you can actually trace them to their purchase invoices you have the correct prices to use. If not, you will use assumption-based methods (FIFO, LIFO, AVCO) <--which may mean something to you, and may not. I'll assume you're familiar with those pretty abbreviations for the moment. If not, tell me and I'll elaborate.
Well, hope that's a start for you.
Regards, Tom

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