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Stock group and valuation
Stock items can be grouped together under "groups" in the inventory section to reflect their classification based on some commonalities. Grouping of inventories will enable easy location, tracking and reporting of stock items in the statements. Therefore, it is recommended that, items of a particular brand/feature be grouped together so that it is easy to trace/extract all items of that brand/feature. For example, a retailer may group the products as beverages (water, soda, juice and the like), cereals (rice, maize, beans, peas, and the like), and soaps (liquid soaps, detergent soaps, medicated soaps, soap bars and the like).
Normally, stock should be valued at the lower of cost or Net Realisable Value (NRV). However, this is simple when a business does not deal with a variety of products. When a business sells many types of different products, then determining the cost and NRV becomes a problem, unless some products are categorised into stock groups. Two (2) basic methods are used to group and value stocks:
Category method
In this method the similar items (like soaps) are put together and then the value of stock is determined by comparing cost and NRV for each category.
Article method
In this method the lower of cost or NRV for each item is taken, and then this is summed up to get the total value of all group (articles).
Stock information for Shujaa as at 31st June, 2019
| Articles | Different Categories | Costs (TZS) | Net Realisable Value (TZS) |
|---|---|---|---|
| 1 | A | 2,500 | 2,000 |
| 2 | A | 3,000 | 3,750 |
| 3 | A | 7,500 | 10,000 |
| 4 | B | 4,500 | 4,250 |
| 5 | B | 3,750 | 3,250 |
| 6 | B | 6,500 | 5,250 |
| 7 | C | 10,250 | 13,500 |
| 8 | C | 9,000 | 10,250 |
| 9 | C | 10,500 | 7,750 |
| TOTAL | 57,500 | 60,000 |
Solution: calculate the value of inventory using the category method
Category A
Total Cost (A) = 2,500 + 3,000 + 7,500 = 13,000
Total NRV (A) = 2,000 + 3,750 + 10,000 = 15,750
Category B
Total Cost (B) = 4,500 + 3,750 + 6,500 = 14,750
Total NRV (B) = 4,250 + 3,250 + 5,250 = 12,750
Category C
Total Cost (C) = 10,250 + 9,000 + 10,500 = 29,750
Total NRV (C) = 13,500 + 10,250 + 7,750 = 31,500
The lower of cost and NRV for each category
Category A: Lower of 13,000 (Cost) and 15,750 (NRV) = 13,000
Category B: Lower of 14,750 (Cost) and 12,750 (NRV) = 12,750
Category C: Lower of 29,750 (Cost) and 31,500 (NRV) = 29,750
Value of inventory
Total Value of Inventory = 13,000 + 12,750 + 29,750 = 55,500
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