Inventory Value Calculator

How it is calculated

Inventory value is units on hand × unit cost, summed across the catalogue. The cost used has to be the landed cost, purchase price plus freight, duty and any other cost of getting the goods into a sellable state, not the supplier's invoice price.

Which cost applies when units were bought at different prices is a costing method decision: FIFO, weighted average or specific identification. The choice changes both the balance sheet value and the reported cost of goods sold.

Numbers on it

300 units bought at $18 landed and 200 at $21 after a supplier increase. Total 500 units for $9,600.

Weighted average values them at $19.20 each. FIFO values the remaining stock at the newest costs, so selling 300 units leaves 200 valued at $21, $4,200, against weighted average's $3,840.

The $360 difference is not cosmetic: it moves through cost of goods sold and therefore through reported profit and tax. In a period of rising costs, FIFO reports higher profit and higher stock value than weighted average, and the gap widens the faster costs move.

What it does not tell you

Valuing at supplier invoice price rather than landed cost understates inventory and overstates gross margin simultaneously. On imported goods the freight and duty commonly add 25% to 40%, and a business valuing at invoice price is reporting margins that do not exist.

Inventory also has to be carried at the lower of cost and net realisable value. Stock that will only sell at a markdown is worth the markdown price, not what it cost, and leaving it at cost overstates the assets.

What follows from it

Fix the landed cost per unit at the point of receipt, when the freight invoice and the duty entry are both available. Reconstructing it months later is possible and nobody does it, which is why so many catalogues are valued at invoice price by default.

Then pick a costing method and hold it. Switching methods between periods makes the accounts incomparable and generally requires disclosure, and the benefit is almost never worth it.

FIFO, weighted average and why LIFO is mostly absent

FIFO assumes the oldest stock sells first, which usually matches physical reality and produces a balance sheet value close to current cost. It is the default in most of the world.

Weighted average smooths cost movements and is simpler to operate where stock is commingled and lot tracking is impractical. It produces less volatile margins, which many businesses prefer.

LIFO, newest stock deemed sold first. Is permitted under US GAAP and prohibited under IFRS, which means it is largely a United States phenomenon and one driven by tax rather than by any claim to reflect reality. For any business reporting internationally, the choice is effectively between FIFO and weighted average, and the deciding factor is usually whether the inventory system can track receipts by lot.

One practical note on landed cost: allocate freight by value or by weight consistently rather than per unit. Spreading a container's freight evenly across mixed goods loads the cheap items with cost they did not incur and understates the expensive ones.

Whichever basis is chosen, using the same one every time is what makes period-to-period margins comparable. Switching between bases produces margin movements that look like performance and are arithmetic.