How do I calculate inventory?

Inventory is the most crucial part of any business. We all agree to that, right? But what happens when this particular essential aspect is not handled carefully? Obviously, everything falls apart! As your stock and inventory is the most essential part of your business, you should never give them into the hands of an inexperienced employee. Because a little mistake in the recording, delivering, or even order could cost you your whole business. However, in the past these types of mistakes were more common than that of today but nowadays as technology is being modernized on a daily basis, inventories of the business also handle more efficiently.

Automated inventory management software is being introduced which helps you to eradicate the risk factors related to manual calculations. Human work is reduced as well as made simpler due to this modernized inventory management software. In addition to this, inventory calculation has become more simple and efficient.

Calculation of Inventory:

Basically, inventory can be defined simply as the goods that you make with the intention of selling them to the general public. Production of that inventory involves various processes regarding the raw material, semi-finished products, and finished products, after that, a product is ready to deliver. It is very important to calculate the right amount of inventory carefully at the end of each accounting year. All the profit or loss of your business is determined by the correct calculation of the inventory of your business. However, this essential operation can be done efficiently by using automated inventory management software that will guide you in every process related to the inventory of your business.

You must be wondering why very much focus is given to this particular task? Simply because the cost of inventory when calculated represents the cost incurred by you to get the calculate inventory ready for its customer till the end when the sale is being conducted for you. As we all know, inventory represents the largest portion of assets in the profit and loss statement at the end of the year. Therefore, you should calculate the inventory and use the appropriate method for its calculation based upon your business’s nature.

Methods of Calculating inventory:

Following are the most common methods of calculating the inventory of your business;

  1. FIFO Method:
  2. LIFO Method:
  3. Specific Identification Method:
  4. Weighted Average Cost Method:
  • FIFO (First-in, First-Out) Method:

The first and most common method of calculating the inventory of your business is the FIFO method. It is the most frequently used process of keeping the correct track of your business’s inventory. In addition to this, there are much fewer chances of errors by using FIFO as your inventory calculation method. 

In this method, the inventory that is bought in the beginning is sold out first. All the other products in the inventory are then equally compared with those which were bought recently so that the older ones could be recognized and sold simultaneously. 

  • LIFO (Last-In, First-Out) method:

Another main method used to calculate the inventory of your business is the LIFO method. It tends to sell those goods that are purchased recently while the older inventory lies in the stock of your business. However, this method is not used by most businesses because it totally ignores the older inventory, which results in the loss of their value. Which in turn affects your business as the stock lays idle in your inventory, only causing you loss. 

A business uses the LIFO method only when they expect the prices of the stock to increase in the future which causes inflation. However, it is favorable for those businesses that when the high-price inventory is being recorded in the COGS statement of the business, it reduces the profit. As a result, businesses have to pay lower taxes which is an advantage FIFO does not offer.

  • Specific Identification Method:

We all know how fast technology and scientific methods are being evolved to ease the work of humans. Using automated inventory management software for the estimation and management of your inventory could help you to attain the goals of the business.

The specific Identification Method is also the most frequently used method for the calculation of inventory of your business. It helps when the inventory size is large and easy to identify. In this method, your business’s inventory is recorded from time to time from when it is purchased to the time when its sale is incurred. 

With this method, you can check every bit of your inventory by using a stamped receipt date, RFID tag, or a serial number that is allocated to the products in the inventory. However, using this method helps you a lot in obtaining the accurate calculation of your inventory but on the other hand, it is only applicable to large-sized products.

Read Also: How To Become A Third Party Seller On Amazon?

  • Weighted Average Cost Method:

The last and rarely used method for the calculation of inventory of your business is the Weighted Average Cost Method. This method is lengthy to conduct therefore used when the products are not easily differentiated from one another and it is not easy to calculate the costs of every single item of inventory.  

The formula of WAC is;

Weighted Average Cost per unit = Total cost of goods in inventory / total units in the inventory

However, using an automated inventory management software like Inventooly is much simpler than using this method. Because each and every item of your inventory is tracked easily and you are informed about your inventory 24 7.

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