Methods not Based on Actual Costs

Two methods under this criterion are generally in vogue :

(a)  Market Value Method : The term "Market value" can mean one of two things : One is the value at which the item of inventory could be sold in the market by the organisation. Since the organisation is not a primary dealer in the (raw) goods making up this inventory, its realization of sales revenue cannot be as much as it would pay if it were to purchase this inventory quantity (if as raw goods). The second is the value at the latter description in the preceding sentence, viz. the value at which the quantity of this inventory (as raw goods) could be obtained or purchased from the market at the time of valuation. Notwithstanding the above distinction, the first implication (or meaning, or connotation) is adopted when valuing finished goods (as these are the market-wise specialized line-of-business outputs of the organisation). But, for raw materials and works-in-progress, management must decide on which of the two implications of market value to adopt. However, as far as taxation is concerned. a consistent method of valuation should be adopted.

(b)  Standard Cost Method : Inventories may be valued on rates of estimated costs or of standard costs. The important commitment required of the management is that these standards must be set up well before hand. It should not be an exercise of "playing football with moving goal posts". Both the consumption and inventory must, in this method, be valued at standard costs, whether or not the actual costs tally with the standard costs respectively for each item or type of material. The difference (often called by the term "variance" - which is, however, used in a different purpose in contexts of statistical analysis) between standard and actual costs will have to be adjusted against the profits, i.e. in the current period's accounts itself. On the other hand, the difference in respect of inventories cannot be adjusted in the current period but only in the period to ensue when the inventory will be consumed. This dual aspect necessitates that the variance in respect of goods sold and inventory remaining unsold be bifurcated. This dual adjustment necessity is a salient disadvantage of this method.