Why Inventory Valuation ?

In a business organisation, be it manufacturing or civil engineering contracting, cost of materials purchased ultimately remains as part of closing inventory if such materials remain unused. And the purchase cost of materials used will constitute, or be distributed within, the cost of finished goods or work-in-progress, as the case may be. If cost accounting is done methodically, it would be possible to determine the value of the inventory of materials, work-in-progress  and finished goods with reasonable accuracy. If, however, no proper costing system is in place in an organisation, evaluation of inventory on hand at the close of an accounting period will necessarily be difficult. Even with a costing system in vogue in the organisation, the method adopted for pricing the issues of materials and finished goods will bear on the value of the closing inventory of the items for the simple reason of having to "balance" the monetary values concerned. Said otherwise, cost of materials purchased has to be assigned either as consumed (or converted) or as inventory on hand; likewise, cost of production should be shown either as inventory or work-in-progress and finished goods or as cost of goods sold.