When talking about inventory accounting software, barring a few exceptions, inventories should be valued lower than historical cost or net realizable value. The exceptions are the inventories of consumable stores, by-products, reusable waste and non-reusable waste.

For the purpose of comparing historical cost with net realizable value, each item in the inventory may be dealt with separately, or similar items may be dealt with as a group. The historical cost of inventories should normally be determined by using the FIFO (first in first out), average cost or LIFO (last in first out) formula.

The specific identification method may be used for inventories of items that are not ordinarily interchangeable or for goods manufactured and earmarked for a specific purpose. Under the specific identification method, specific costs are identified with goods segregated for a specific purpose. The adjusted selling price may be used in retail business or in businesses where the inventory comprises items whose costs are not readily ascertainable. Adjusted selling price method is also used by some manufacturing organizations for valuing the inventory of finished products held against forward sale contracts.

The standard cost method of valuing inventories may be used if the results approximate consistently with results obtained in accordance with FIFO, average cost or LIFO formula. Overheads, other than production overheads, should be included as part of the inventory cost only to the extent to placing inventories in their present location and condition.

The accounting policy adopted for the valuation of inventories, including the cost formula used, should be disclosed in the financial statements.

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