Inventory Valuation Methods and Management

This assignment explores the four major inventory valuation methods - Throughput, Direct or Variable, Full Absorption, and Activity-Based Costing - and their implications on management decisions. It also delves into the three core aspects of management: planning, control, and decision-making, highlighting their differences and applications in a business context.

Running head: GLOBAL BUSINESS MANAGEMENT
Global Business Management
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1GLOBAL BUSINESS MANAGEMENT
Table of Contents
i. Three aspects of management:.....................................................................................................2
ii. Inventory valuation:.....................................................................................................................3
References:......................................................................................................................................7

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i. Three aspects of management:
The major points of differences between planning, control and decision-making in the
context of business accounting are described briefly as follows:
Points of
dissimilarities
Planning Control Decision-making
Purpose In this aspect, the
future activities of the
organisation are
planned that take into
account maximisation
of financial benefits
and minimisation of
financial
consequences
(Morden 2017).
In this aspect, the
departmental
activities are
controlled in order to
assess the
performance of each
area. This would help
the management of JJ
Limited to ascertain if
the actual activities
are going according to
the planned activities
for each capital
expenditure or each
department.
After analysing all the
financial benefits and
consequences, the
accounting managers
ascertain those
business areas
performing efficiently
and those areas that
need to be changed
(Keveson and
Garrison 2017).
Activities The planning
activities include
budgeting, analysis of
The controlling
activities include
preparation of
The decision-making
activities include the
decisions undertaken

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capital expenditure
and production
planning (Dengue
2017).
monthly budget
reports by listing
actual expenses and
budgeted expenses
and then listing the
difference.
on the part of the
managers and such
decisions are
communicated to the
top management for
implementation
purpose.
Example A factory manager
could start a program
of supplier evaluation
for selecting the most
feasible suppliers.
A manager could
prepare performance
reports for gauging
the productivity of the
staffs.
An accounting
manager could assess
the costs that vary
between advertising
choices for each
product. However, the
manager does not take
into account the
common costs.
ii. Inventory valuation:
The four inventory valuation methods and their impact on the overall inventory value are
described as follows:
Throughput inventory valuation:

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In the words of Collier (2015), throughput is the rate at which purchased components and
raw materials are converted into the products sold to the customers. In monetary terms, it is the
additional amount, which an organisation makes by selling its products. Thus, throughput could
be obtained by deducting the cost of raw material from revenue. Throughput accounting is an
approach, which is linked with the Just-In-Time philosophy. This method follows certain
concepts, which are evaluated briefly as follows:
 Majority of the factory costs except the raw material costs are constant in the short-run.
These fixed costs comprise of direct labour and they are referred as total factory costs as
well.
 The ideal level of inventory is nil under the Just-In-Time philosophy. Hence, unless the
customer places an order, there is no need to manufacture the products. The valuation of
work-in-process needs to be made at material cost only until the sale of the output. The
aim is to add value and earn profit until the occurrence of sale (Wild 2017).
Hence, it could be stated that in throughput valuation, inventory is not considered as asset.
Instead, it is the output of unsynchronised production and it is considered as the impediment to
earning profit.
Direct or variable inventory valuation:
In this method, the cost calculation is utilised in order to make decisions intended at sales
and production planning. This concerns direct costing of labour and materials providing a quick
insight for making cost indication. This valuation method could be extremely valuable for JJ
Limited at the time of making decisions for cost control. However, this method only takes into
account direct variable costs by excluding the overhead costs including overhead. This is because

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this method is useful for short-term decision-making; however, it could not be used in
undertaking long-term decisions.
Direct costing could not be used for valuing inventory, since both IFRS and GAAP do
not allow the same (Lee, Lee and Lee 2016). The reason is that under the direct costing method,
all costs including the direct costs are charged to the present period. Moreover, the valuation of
inventory for tax purpose under this method is not allowed according to the legislations, since the
application of overhead cost would not be made to inventory. As a result, it would lead to
minimised inventory cost.
Full absorption costing:
This is a method for costing inventory, in which all variable costs and fixed costs are
allocated to the cost centres accounted to utilise absorption rates. This method is used primarily
for external reporting purpose. The major costs apportioned to products under full absorption
costing system include the following:
 Direct materials included in a finished product
 Factory labour costs needed to manufacture a product
 Variable manufacturing overhead for operating a manufacturing unit changing with the
volume of production
 Fixed manufacturing overhead for operating a manufacturing unit not changing with the
volume of production (Feng et al. 2014)
However, since absorption costing needs the allocation of a bigger portion of the costs of a
product, it could not be traced directly to the product. This is a needed inventory costing method
for external reporting. However, if JJ Limited uses this method, it might be misleading in order

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to undertake management decisions due to the component of fixed overhead. Hence, it might
result in either overvaluation or undervaluation of inventory on certain occasions.
Activity-based costing system for inventory valuation:
Activity-based costing could be defined as the process of apportioning cost to services,
products, tasks, acquisitions depending on the activities passed to them and the consumption of
resources on the part of such activities. However, most of the organisations do not use this
method for external reporting, since it fails to provide detailed information. The costs related to
individual products are not revealed. Even though it reports the cost of sales and the inventory
valuations, it does not provide any breakdown of accounts in terms of products (Weygandt,
Kimmel and Kieso 2015).
In case, there is under-costing or over-costing of some products, the products are added
together for cancelling the errors. In addition, for external reporting, only manufacturing costs
need to be taken into consideration. However, this method takes into account certain non-
manufacturing costs as well while excluding few manufacturing overheads. Hence, it might
result in wrong valuation of inventory, if utmost care is not undertaken.

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References:
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Dengue, C., 2017. Principles of Management. Evidence-Based Critical Care: A Case Study
Approach, p.513.
Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over
financial reporting affect a firm's operations? Evidence from firms' inventory management. The
Accounting Review, 90(2), pp.529-557.
Keveson, B. and Garrison, G.W., 2017. Principles of Management. Evidence-Based Critical
Care: A Case Study Approach, 1, p.453.
Lee, A.C., Lee, J.C. and Lee, C.F., 2016. Credit, Cash, Marketable Securities and Inventory
Management. World Scientific Book Chapters, pp.989-1041.
Morden, T., 2017. Principles of management. Routledge.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Wild, T., 2017. Best practice in inventory management. Routledge.