Material Inventory Valuation Procedure-Replacement Cost (NIFO) Inventory Valuation Method

Specific objective; definition; replacement cost inventory valuation method; example

Specific Objectives

This article is guided by the following 2 specific objectives. The learner/user of this article will be able to;

1. Define the term replacement cost inventory valuation method
2. Compute inventory monetary value using replacement cost inventory valuation method

Replacement Cost (Nifo) Inventory Valuation Method 

Definition

Replacement cost method is also referred to as Next in First Out (NIFO). The valuation of the inventory of concern is the replacement cost or market price. Although the approach is realistic, it is hard to estimate the monetary value of the next inventory for it is unknown.

When valuing issuance of inventory, the futuristic price is used. The assumption is that the prices used against the future purchases as per the inventory schedule is appropriate to be assigned to inventory on issuance. The procedure of dropping and picking the next price is more appropriate in this method. Let’s look at the same illustration we have used before. 

Example  

 Polite Notice (PN) company ltd provided you with the following inventory details for the month of August 2021

Required

Using the above information, determine the monetary value of closing inventory at the end of August under REPLACEMENT COST inventory valuation method.    

Solution

Explanation of inventory Issuance- REPLACEMENT COST inventory valuation method above

Note: That, total units of inventory before issuance begins was 200 units made up of 1^stAugust 125 units plus 5^th August 75 units. Then…

11^th August the first 100 units of inventory was issued and was from the 1^st August 125 batch of units of inventory received. The balance after that issuance was 25 units of inventory. On 13^th August the next issuance of 50 units of inventory was made and was from two batches; first, 25 units were gotten from the 1^stAugust batch of inventory whose balance was 25 units and second, the remaining 25 units was picked from the 5^th August batch.  On 16^th August, received additional 150 units of inventory. So, the current total units of inventory are 50+150=200. On 20^th August, another issuance of 75 units of inventory was made. So, 50 units were picked from the 5^th August batch of inventory which had a balance of 50 units. This batch got exhausted. Therefore, the remaining 25 units to be issued was from the 16^th August batch where by the balance was only 125 units. Then another additional inventory was received on 25^th August made up of 50 units translating to inventory of 175 units in total. Then the last issuance was an inventory of 25 units which was picked from the 16^th August batch. Now this resulted to a balance of 100 units. So, after the last issuance, we had a final balance of 150 units in total (made up of 100 units of 16^th August batch plus 50 units of 25^thAugust batch).

Note that the superscripts (i.e., *, ** ,1*and 2*) used below will guide you on which inventory batch each issuance was picked from. This inventory analysis is a computational proof of monetary value of closing inventory as at 30^th/08/2021.