Stock valuation: cost vs selling value, FIFO vs weighted average, and dead stock

What is stock valuation?

Stock valuation is putting a money figure on the goods you hold on a given day. You need it for your accounts, where stock counts as an asset and changes your profit, and to run the business, because it shows how much cash is sitting on your shelves.

There are two everyday ways to look at it, and you need both:

• Stock at cost: what the goods cost you to buy and bring in.
• Stock at selling price: what they would bring in if sold at your current prices.

What is the difference between stock value at cost and at selling price?

Cost value tells you how much money you have spent and not yet recovered. Selling value tells you what that stock could become. The gap between them is the potential margin: profit you could make if everything sells at full price.

Worked example. A shop holds three lines:

Potential margin % = (selling value − cost value) ÷ selling value

Here: 2,040 ÷ 4,000 = 51%.

Two warnings. First, potential margin is not profit; it assumes every unit sells at full price, which never quite happens. Second, look at it per line. The headphones carry the most cash (880) but the lowest margin (37%). If they also sell slowly, that is where your money is stuck. For the difference between margin and markup, see markup vs margin.

What counts as "cost" in stock valuation?

Cost is everything it took to get the goods to where they are ready to sell, not just the supplier's price. Under the international standard for inventories (IAS 2), cost includes the purchase price, import duties and non-recoverable taxes, transport and handling, less trade discounts and rebates.

Worked example. You import 500 units at 6 each (3,000). Freight is 250, duty is 150, and the supplier gives a 2% trade discount (60).

• Landed cost = 3,000 − 60 + 250 + 150 = 3,340
• Cost per unit = 3,340 ÷ 500 = 6.68

If you value these at 6, every report overstates your margin by 0.68 a unit. Selling costs, storage after arrival and general overheads are not part of stock cost.

FIFO vs weighted average vs latest cost: which should you use?

When you buy the same item at different prices, you need a rule for which cost goes with each sale and which stays in stock. The two methods accepted under IAS 2 for ordinary goods are FIFO and weighted average. Latest cost is a quick management view, not an accounting method.

• FIFO (first in, first out): the oldest cost is used first for sales; what remains is valued at the most recent costs.
• Weighted average: every unit carries the average cost of all units held, recalculated after each purchase.
• Latest cost: all units valued at the most recent purchase price.

Worked example. You buy 100 units at 10, then 100 more at 12. Then you sell 150.

If you sold the 150 for 2,400, gross profit is 800 under FIFO and 750 under weighted average. Same goods, same sales, different profit. Neither is wrong; they spread the price rise differently. When prices rise, FIFO shows a little more profit and a higher stock value; weighted average smooths the change.

Now suppose your supplier raises the price to 14 next week, before you buy any more. Latest cost would value the 50 units at 700, though you paid nothing like that for them. That is why latest cost is fine for a quick replacement-cost check but should not go in your accounts.

Choose with your accountant, then stay consistent. Switching methods from year to year makes profit figures impossible to compare.

When should you value stock below cost?

When it is worth less than it cost. The rule in IAS 2 is that stock is carried at the lower of cost and net realisable value: the price you can realistically sell it for, less the costs of making that sale.

Worked example. You hold 200 units of a discontinued item that cost 8 each (1,600). Its normal price is 15, but nobody buys it now. A clearance buyer will pay 5 each, and you will spend 0.50 a unit on extra delivery.

• Net realisable value = 5 − 0.50 = 4.50 a unit
• Value in stock = 200 × 4.50 = 900
• Write-down = 1,600 − 900 = 700

The 700 is a loss whether you record it or not. Recording it now shows the true position and stops you from pricing other decisions on stock that is not really there.

How do you spot slow-moving and dead stock?

Age your stock by the date each line last sold. Set your own limits to suit what you sell; for many shops and wholesalers, no sale in 90 days is slow and no sale in 180 days is dead.

Worked example. A stock ageing summary at cost:

18,000 (15%) of this business's stock has not sold in three months. That is cash that could pay for faster-moving lines. For each slow or dead line, choose one action and give it a date:

1. Move it: put it in a better spot, show it to reps, include it in customer offers.
2. Mark it down: a planned price cut while it still has some value.
3. Return or swap it: many suppliers accept returns or exchanges for slow lines, especially if you keep buying other products from them.
4. Bundle it: pair it with a fast seller.
5. Clear it: sell to a clearance buyer and take the loss.
6. Write it off: dispose of it properly, record the adjustment with a reason, and stop reordering.

Then find out why it happened: over-ordering, a range nobody asked for, or a reorder point that was never reviewed. The reorder point guide helps prevent the first.

What is loss before and after discount?

It is the difference between the margin a sale would have made at list price and the margin it actually made after discounts. A line can look profitable on the price list and lose money as sold.

Worked example. Four sales of a product with a cost of 14 and a list price of 20:

Before discount, all four sales look like 6.00 profit, 24.00 in total. After discount, they made 10.00, and sale D lost money. At a 30% margin, any discount above 30% sells below cost.

Check this monthly by product and by customer. If one rep or one customer accounts for most of the discount loss, that is a pricing conversation, not a stock problem.

What is a monthly stock valuation checklist?

• Count, or at least spot-check, before valuing. A valuation of wrong quantities is wrong; see how to do a stocktake.
• Check that cost prices include freight and duty, and are net of trade discounts.
• Value stock at cost and at selling price; note potential margin per category.
• Run stock ageing and list lines with no sale in 90 days.
• Write down anything worth less than cost to its net realisable value.
• Review sales sold at a loss after discount.
• Compare stock value with last month. Rising stock with flat sales means cash is building up on the shelves.

For the full routine around these numbers, read the stock control guide.