Inventory Valuation Methods for Raw Materials

Posted by: Richard Smith Post Date: 9th August 2017

When working on inventory valuation, you need to establish:

  • The cost of the raw materials issued to production and;
  • The value of the stock of raw materials left unused in the stores at the year-end

At the year-end there may be stocks of raw material held in the stores department. The cost of the raw materials will be known from the purchase invoices, but closing stock may be made up of materials delivered at different times and at different prices. This makes it difficult to match the closing stock with the prices paid exactly. It may be extremely time consuming even to try.

Inventory accounting: stock valuation methods for raw materials

Cost accountants have therefore developed three methods for placing a price on material issues from stores, and valuing the closing stock of raw materials.

FIFO (First in, First out)

This inventory valuation method assumes stock issued from stores is taken from the oldest stock held. Issues to production are, therefore, charged at the oldest prices, and the remaining stock is valued at the latest prices.

LIFO (Last in, First out)

This method assumes stock issued from stores is taken from most recent deliveries. Issues to production are, therefore, charged at the latest prices, and the stock remaining in the stores is valued at the older prices.

Get the guide to stock valuation in accounting

Enter your details to access our expert resource

Stock valuation guide

(you can unsubscribe at any time by clicking the link at the bottom of an email)


Click submit once and you'll receive a confirmation email shortly

AVCO (Average Cost/Weighted Average)

This method charges an average price for issues to production. The total value of stock in the stores is divided by the total number of units in stock, giving an average cost per unit. The average cost is re-calculated each time a new delivery is received.

Each method will value the issues to production differently, which will also then lead to the closing stock being valued differently. As closing stock is used to calculate the cost of sales for a business, the value of the closing stock and method chosen will have a direct effect on the profit of the business – so much so that LIFO as a pricing and inventory valuation method is available for internal (cost accounting) purposes only. In the preparation of the financial accounts IAS 2 does not permit LIFO as a method of inventory valuation.

If you’d like to develop a sound understanding of accounting principles and practices, get in touch about our range of accounting courses. With many of our courses, you can study at your own pace from wherever you like, with expert tutor support and access to our virtual learning environment.

Want to become a qualified accountant?

Get in touch below to find out how, or call us on
01332 613 688


Click submit once and you'll receive a confirmation email shortly

Share this post


By continuing to use the site, you agree to the use of cookies to improve your experience. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close