Stock Valuation Methods

TallyPrime allows users to value stock in different methods. Each stock item can be set up to have a different stock valuation method. There are instances where only a particular method of stock valuation is applicable, for example, to assess the replacement value or saleable value of stock.

There are two valuation methods for Inventory Items:

• Valuation based on Cost of product.
• Valuation based on Market Price of product.

Costing methods

Stock valuation can be calculated using a number of different Costing methods.

• At Zero Cost
• Avg.Cost
• FIFO
• FIFO Perpetual
• Last Purchase Cost
• LIFO Annual
• LIFO Perpetual
• Std. Cost
• Monthly Avg. Cost

Market Valuation methods

• At Zero Price
• Avg. Price
• Last Sales Price
• Std. Price

Costing Method at Zero Cost

When Zero Cost valuation is selected, inventory will be valued at zero cost irrespective of the purchasing rate and current balance at hand.

This is extremely useful in sub-contracting environments, where material quantities need to be tracked which are received from the principal, but which do not carry any monetary value with respect to our own books.

Entries are shown below:

Date	VCh Type	Inwards			Outwards
		Quantity	Rate	Value	Quantity	Rate	Value
01/04/20	Purchase	10.00nos	100.00	1000.00
02/04/20	Purchase Bill Pending	2.00nos	175.00	350.00
03/04/20	Purchase	10.00nos	200.00	2000.00
04/04/20	Purchase	25.00nos	225.00	5625.00
05/04/20	Sales				10.00nos	300.00	3000.00
06/04/20	Sales				15.00nos	400.00	6000.00
		47.00nos	183.50	8975.00	25.00nos	360.00	9000.00

In the stock item master, when the costing method is selected as ‘Zero Cost’, closing value will be ‘Zero’.

Average Cost valuation

Average Cost Valuation [Periodic]

Define ‘Average Cost’

Average Cost or Weighted Average Cost = Total Cost [Inward Value] / Total Qty [Inward qty] {Annual}

Flow of Average Cost Calculation in Tally

The example provided below shows the Flow of the Average Cost in Tally.

Entries:

Date	Particulars	Tracking Number	Qty	Rate	Amount
02-04-2020	Receipt Note	No.1	100	120	12000
04-04-2020	Purchase	Against No.1	50	125	6250
05-04-2020	Sales		15	150	2250
10-04-2020	Rejection Out	Against No.1	-5	120	-600
11-04-2020	Debit Note	Against No.1	2	120	240
24-04-2020	Purchase	Against No.1	47	135	6345

Let us see how the Average Cost is valuated in TallyPrime for the entries mentioned above:

		Inward			Tracking System				Average Cost
Date		Qty	Rate	Amount	No.	Qty	Rate	Amount	Qty	Rate	Amount
02-04-2020	Receipt Note				1	100	120	12000	100	120.00	12000
04-04-2020	Purchase	50	125	6250	1	-50	120	-6000	100	122.50	12250
05-04-2020	Sales								100	122.50	12250
10-04-2020	Rejection Out				1	-5	120	-600	95	122.63	11650
24-04-2020	Purchase	47	135	6345	1	-47	120	-5640	95	130.05	12355

 

		Outward			Consumption		Closing (Daily)			Closing (Stock Voucher)
Date		Qty	Rate	Amount	Rate	Amount	Qty	Rate	Amount	Qty	Rate	Amount
02-04-2020	Receipt Note						100	120.00	12,000.00
04-04-2020	Purchase						100	122.50	12,250.00	50	245.00	12,250.00
05-04-2020	Sales	15	150	2250	122.50	1837.5	85	122.50	10,412.50	35	297.50	10,412.50
10-04-2020	Rejection Out						80	122.63	9,810.53	35	280.30	9,810.53
11-04-2020	Debit note						80	122.63	9,810.53	33	297.29	9,810.53
24-04-2020	Purchase						80	130.05	10,404.21	80	130.05	10,404.21

A detailed explanation for the calculation shown above is as follows:

On 2nd April 2020

A Receipt Note entry was passed with a tracking number No.1. So the Average Cost on 2nd April 2020 is 12000/100 = Rs.120.

In the Stock Voucher details, the Receipt Note show the closing value as Rs. 12000 under the Purchase Bills pending [collection].

In a daily balance, press F6. The Closing Value of stock is displayed as Rs.12000.

On 4th April 2020

The Purchase Entry is passed against Receipt Note no.1. Already the Receipt Note cost is added to the Inward Cost on 2nd April 2020. The difference between the Receipt Note value and Purchase value will be added from the Inward Cost.

The Purchase value is Rs. 6250 and the Receipt Note value is 6,000 so the difference, which is Rs.250 will get added to the Inward Cost.

As on 4th April 2020, the Average Cost = (12000+250) / 100 = 122.50. The Closing Value is Rs.12,250 for 100 nos.

Closing Qty > Opening Quantity + Inward Quantity – Outward Quantity

Closing Rate > Closing Value / Closing Qty

Closing Value > System determined value as per valuation method selected in the Item Master

On purchasing a line item, the closing rate is shown as Rs.245 [12250 / 50 ] since the closing value on that day is Rs.12,250 and the closing quantity as per Stock Voucher is 50. This is because the Receipt Note will show it under the collection of Purchase Bills pending.

In the Daily breakup, the difference of the Receipt Note and Purchase is added to the Closing Value.

On 5th April 2020

Sales made for 15 nos. of Quantity.

The Cost of Sale is determined based on the Average Cost on 5th April 2020. The Average Cost continues to be Rs.122.50 since there is no change in the Inward Cost. So the consumption or cost of sale = 15 nos. x Rs.122.50 = 1837.50

Likewise the Closing Value of an item = [100-15] x [122.50] = 85 x 122.50 = 10412.50

Transactional Consumption –> System determined value based on valuation method

Total Consumption –> Opening Value + Inward Value – Closing Value

Transactional Gross Profit –> Outward Value – Transactional Consumption value

Total Gross Profit –> Total Outward Value – Total Consumption value

On 10th April 2020

The Rejection Out entry was passed against Tracking number 1 for 5 Nos.

Since the item is sent out of the company, the valuation gets affected. So the Rejection Out value automatically gets reduced from the Inward Cost.

Average Cost = [12250 – 600] / [100-5] = 11650/95 = Rs.122.63

Closing Quantity = 85 – 5 = 80 Nos.

Closing Value = 80 Nos. x Rs.122.63 = 9810.53

On 11th April 2020

The Debit Note entry is passed against the Rejection Out Tracking number 1. Already a Rejection Out cost is included in the Inward Cost and only the difference of the Debit Note Cost and Rejection Out cost gets included in the Inward Cost.

The difference between a Debit Note and Rejection out = [2 x 240] – [2 x 240] = Zero.

The Average Cost continues to be Rs.122.63 since there is no change in the Inward Cost.

Closing value = 80 x 122.63 = 9810.53

On 24th April 2020

A Purchase Note is raised against a balance Receipt Note tracking Number 1. Since the Receipt Note Cost is already included in the Inward Cost, only the difference between a Receipt Note Cost and Purchase Cost can be included in the Inward Cost.

The difference between a Purchase and Receipt Note = [47 x 135] – [47 x 120] = Rs. 705 is added to the Inward Cost.

Total Inward Cost = Rs.11650+ 705 = 12355

Total Inward Qty = 95

Average Cost = 12355 / 95 = 130.05

Closing Quantity = 80

Closing Value = 80 x 130.05 = 10,404.21

Rs.955 is the difference between the Purchase and Receipt Note cost. [250+705=955]

First In First Out – FIFO

First In First Out is the traditional method of valuation.

The value of the current closing stock is treated as a collection of the ‘residual’ stock working back from the last purchase, until the Financial Year opening stock. It is assumed that the goods issued or sold currently are those which represent the earliest purchased amongst the goods sold in inventory. This would mean that the goods which remain in stock after the sales/issues are those which represent the most recent purchases.

Entries are shown below:

Date	Vch Type	Location	Batch	Inwards			Outwards
				Quantity	Rate	Value	Quantity	Rate	Value
01/04/20	Opening Bal	Chennai Location	B2	6.00 nos	95.00	600.00
01/04/20	Opening Bal	Main Location	B1	10.00 nos	100.00	1000.00
01/04/20	Purchase	Main Location	B1	10.00 nos	100.00	1000.00
02/04/20	Purchase Bills Pending	Chennai Location	B2	2.00 nos	175.00	350.00
02/04/20	Sales	Main Location	B1				5.00 nos	400.00	2000.00
02/04/20	Purchase	Chennai Location	B2	10.00 nos	200.00	2000.00
				32.00 nos	122.81	3930.00	5.00 nos	400.00	2000.00

FIFO method will consider the ‘First In First Out’. When ‘Location’ and ‘Batches’ exists, it will walk through the ‘Location’ and ‘Batches’.

Let us now analyze how the closing value has arrived for the above entries.

Opening Balance : Chennai location=> B2=6.00 nos Rs. 95.00/-
Main Location=> B1=4.00 nos, Rs. 90.00/-

Purchase :Main Location=> B1=10.00nosRs.100.00/-

Hence, On 1st April 2020:

4 nos (Opening Bal =>Main location=> B1) x 90 =360

6 nos (Purchase=> Chennai Location => B2) x 95=570

10 nos (Purchase=> Main location => B1) x 100 =1000
1930/-

On 2nd April 2020:

Receipt Note was raised for 2.00 nos and sales (Main Location=> B1) was raised for 5 nos.
Hence Closing Quantity = 17 nos

Let see how Closing Value is getting calculated:

A sale was done from ‘Main Location’- ‘B1’ Batch. and Receipt Note was raised from ‘Chennai Location’- ‘B2’ location.

Let us arrive at the cost of 2.00 nos of the ‘Receipt Note’.

Closing Value of ‘Chennai Location’ as on 02.04.2020 is Rs. 95/- i.e., Opening Balance for Chennai Location is570/6 = 95/- (Total Inward Quantity/Total Inward Value) . After this there are no transactions for ‘Chennai Location’ – B2. Hence closing rate is Rs. 95/-

Receipt Note 2 nos x 95 = 190
Purchase (10 nos – 1 nos (for sales))9 nos x 100=900
Opening bal ( Chennai Location) 6 nos x 95= 570
1660/-

On 3rd April 2020:

Closing Quantity = 27 nos

Let us see how Closing Value is getting calculated:

Purchase has been raised from ‘Chennai Location’ – ‘B2’ Batch. As on 3rd April 2020, Closing value for ‘Chennai Location’–> B2 batch is Rs. 2861.25/-
Remaining from ‘Main Location’–> B1 batch is Rs.900.00/-
Rs. 3791.25/-

FIFO Perpetual

Stock Items purchased FIRST are sold FIRST across the Financial Year (i.e. First LOT could be from any previous Financial Year entry).

FIFO Perpetual

FIFO Perpetual is one of the stock valuation methods used for calculating closing balance of inventory in TallyPrime. The inventory reports use valuation methods in case of intra-year reporting.

In this intra-year reporting, when books are closed at the end of a financial year, closing balance is carried forward to next financial year. Thus inventory reports use the values from closing balance for reporting in the new financial year.

FIFO Perpetual valuation method helps in carrying forward balances based on actual purchase costs and it displays the cost/consumption values in inventory reports of the new financial year accordingly.

For example

Scenario 1: Valuation method – FIFO

The closing balance for the stock item at the time of closing of books:

Transaction	Item	Quantity	Rate	Value
Purchase	00001	100	100	10000
Purchase	00001	100	120	12000

Item: 00001

Quantity: 200

Value: 22000

When stock item 00001 is used in the new financial year, the inventory reports will display the cost /consumption value of these items at the rate -100 (Rate= 22000 (Value)/200 (Quantity).

Scenario 2: Valuation Method – FIFO Perpetual

Transaction	Item	Quantity	Rate	Value
Purchase	00002	100	100	10000
Purchase	00002	100	120	12000

The closing balance for the stock item at the time of closing of books:

Item: 00002

Quantity: 200

Value: 22000

When stock item 00002 is used in the next financial year, the inventory reports will display the cost/consumption value at the rate – 100 for the first batch of stock and 120 for the second batch i.e. based on the actual purchase price.

Last Purchase Cost costing method

In the Last Purchase Cost costing method, the closing value of the stock item is calculated based on the rate of the last purchase

Consider an example below:

Date	VCh Type	Inwards			Outwards
		Quantity	Rate	Value	Quantity	Rate	Value
01/04/21	Purchase	10.00nos	100.00	1000.00
02/04/21	Purchase	12.00nos	150.00	1800.00
03/04/21	Purchase	10.00nos	200.00	2000.00
04/04/21	Purchase	25.00nos	225.00	5625.00
05/04/21	Sales				10.00nos	300.00	3000.00
06/04/21	Sales				15.00nos	400.00	6000.00
		59	183.47	10825.00	25.00nos	360.00	9000.00

As on 1st April 2021 = closing rate will be taken Rs. 100/-.

As on 4th April 2021, a purchase is made for 25 numbers at Rs.225/-, hence the closing rate will be taken as Rs.225.

Note: In the absence of a purchase transaction, the closing value of the stock item will be calculated as the average rate of all inward transactions such as stock journal, material in, material out (with destination location details), Debit note and Rejections out.

The closing value of stock item is calculated irrespective of locations and batches.

Last In First Out (LIFO) costing method

LIFO is one of the stock valuation methods used for calculating closing balance of inventory in TallyPrime. It is further classified into two methods, LIFO annual and LIFO perpetual, which are detailed in this topic.

LIFO ANNUAL

The stock items ‘last’ lot ‘input’ becomes the ‘first’ to get consumed, while the earlier/earliest lots remain unused under the current Financial Year. LIFO Annual restricts the LIFO behavior to the present Financial Year and treats the Opening Stock as the ‘First Lot’.

LIFO PERPETUAL

The stock items purchased in Last LOT are sold FIRST.In Perpetual LIFO, the very first input into the system, even if it was 10 years ago (!) gets treated as the ‘First Lot’.

When these entries are passed in TallyPrime, closing value will appear as below:

As on 1st April 2020:
Purchase of 10.00 nos for Rs.100/- = 1000/- (Main Location= B1 – Batch)

As on 2nd April 2020:
Purchase of 10.00 nos for Rs. 150/- = 1500/- , hence the ‘Closing Value’ will be 1000 + 1500 = 2500/- (Main Location= B1- Batch)

As on 3nd April 2020:
Sale has been done from ‘Main Location-> B1- Batch’ for 5 nos. Now Last Purchase is First Out i.e., purchase as on 2nd April is the last purchase.

Closing Value will be calculated as below:

Remaining stock item from 2nd April purchase is5.00 nos x 150= 750
Stock item from 1st April purchase is10.00 nos x 100 = 1000
1750/-

As on 4th April 2020:
Purchase of 10.00 nos for Rs. 200/- = 2000/- ( Chennai Location-> B2- Batch) , hence the ‘Closing Value’ will be:

Purchase as on 4th April =2000 (10 x 200)
Purchase as on 2nd April =750 (5 x 150)
Purchase as on 1st April= 1000 (10 x 100)
3750/-

As on 5th April 2020:
Sale has been done from ‘Chennai Location- B2- Batch’ for 5 nos. Now Last Purchase is First Out i.e., purchase as on 4th is the last purchase.

Closing Value will be calculated as below:

Remaining stock item from 4th April purchase is5.00 nos x 200=1000
Stock item from 2nd April purchase is5.00 nos x150 =750
Stock item from 1st April purchase is 10.00 nos x 100 =1000
2750/-

Standard Cost costing method

Standard Cost can also be called as User Specified Rate. Once when Std Cost is specified (Std rate to be specified in the Inventory Master screen), this rate is applicable for the current date irrespective of the price/cost of purchase/input.

This type of valuation is used where the daily variances of purchase are not expected to effect the value inventory. For example: Gold.

When Standard Cost is chosen, the Batches and Locations become irrelevant, and the entire inventory for this item is valued at Std rate.

In the stock item master screen, set Yes to Allow Std. Rates for Stock Items.

In the stock item master screen, set Set Standard Rates to Yes.

Press F12 (Configure) > set Provide Standard Selling and Buying Rates as Yes.

If you do not see the option:

• Set Show more configurations to Yes.
• Set Show all configurations to Yes.

Give the Std rate for the stock item from the date of applicable, this rate will be considered for the stock valuation.

Under Costing Method, select Std Cost.

Once when Std rates are defined, while raising the purchase invoice (when cost price is defined) or sales invoice (when selling price is defined) rates will be automatically picked up.

In our above example as on 3rd April 2020, Std rate is defined Rs. 500/-. Let us raise the purchase invoice on 3rd April 2020.

In case, if the data already exists, and from certain date if user would like to change the cost price and selling, user can define the same in Std rate. Let us see how the std rates will get affected for the given data.

 

Date	VCh Type	Location	Batch	Inwards			Outwards
				Quantity	Rate	Value	Quantity	Rate	Value
01/04/09	Purchase	Main Location	B1	10.00nos	100.00	1000.00
02/04/09	Purchase	Main Location	B1	20.00nos	150.00	3000.00
03/04/09	Purchase	Chennai Location	B2	10.00nos	200.00	2000.00
04/04/09	Purchase	Chennai Location	B2	25.00nos	225.00	5625.00
05/04/09	Sales	Chennai Location	B2				10.00nos	300.00	3000.00
06/04/09	Sales	Main Location	B1				15.00nos	400.00	6000.00
				65.00nos	178.85	11625.00	25.00nos	360.00	9000.00

Std rate has been defined as on 3rd April 2020, Rs.500/- is applicable from 3rd April.If there are any vouchers exists before the date of std rate, it will take the Last Purchase Cost.

In our above example, as on 2nd April 2020, closing value is Rs. 4500/-. i.e., 30 nos x 150 (last purchase cost) = 4500/-. Thereafter closing value will be calculated based on the std rate specified.

In case if the Purchase Bills Pending exists, it will avg the closing value. Vouchers are passed as below:

As on 1st April 2020:
Receipt Note has been raised for 10 nos Rs. 3000/- and purchase invoice was raised for 2 nos Rs. 600/, hence 3000+600 = 3600, 2 nos / 3600 = 1800/

As on 3rd April 2020:
Std Rate: Rs.500/- is applicable from 3rd Apr 2020.
Closing Quantity = 14 nos
Closing value= 14 x 500 = 7000/-

Monthly Average Method of stock valuation

In the monthly average costing method, the closing value of each month will be treated as opening for the next month.

In the above illustration, the rate (highlighted) is derived as below:

Formula:

Closing rate= Total inward value/total inward quantity.

April month: 47500/200= 237.50

Consumption is derived as below for April month:

Outward quantity * closing rate as on that date.

Example: On 4-4-2020: 50*100= 5000 (consumption)

Gross profit = Value- Consumption

i.e 125000-5000= 120000

Gross profit percentage = Gross profit/value*100

120000/125000*100= 96.00%.

The closing rate is derived as below for May:

Formula:

Closing rate= Total inward value/total inward quantity.

55750/290= 192.2414 or 192.24

55750 comprises of last month’s closing value (treated as opening) + this month inward.

55750= 332520+22500

Where rate = 55750/290 = 192.24

Consumption is derived as below for May:

Outward quantity * closing rate as on that date.

Example: 11-5-2020 : 90*192.2414= 17301.726 or 17301.72 (consumption)

Gross profit = Value- Consumption

243000-17301.72=225698.28

Gross profit percentage = Gross profit/value*100

225698.28/243000*100=92.88%.

When you see the report as a whole, the same will be shown as below:

The total Consumption is derived from the below formula:

Opening Value + Inward Value – Closing Value

i.e. 70000-38448.27= 31551.73.

Gross profit = Value-Consumption

394000-31551.73= 362448.27