Valuation and ICANZ

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Last updated: May 28, 2012Version comment
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(Institute of Chartered Accountants of New Zealand)

Workbench has three valuation methods throughout the stock module.

  • Standard Cost
  • Average Cost
  • Last Cost

FRS 4: Accounting For Inventories is the Institute of Chartered Accountants of New Zealand (ICANZ) Financial Reporting Standard relating to the valuation of Stock. This was issued in May 1994.

In summary, (showing how this relates to Workbench):

  • ICANZ allow a FIFO (First In First Out) or a weighted average cost formula.
  • Workbench does not account for stock on FIFO method unless the client has a detailed method of arriving at Standard Cost. Using Standard Cost is acceptable as long as "…… standard costs are to be realistically attainable and are to be reviewed regularly and revised to reflect actual costs." 5.17
  • Workbench has a system of Average Cost and this is the recommended method. Standard and Last Cost do not cope with the nuances of GL Integration.

Following is a brief synopsis of how Average Cost operates in Workbench.

When a stock item is first established the Average Cost is taken to be the Standard Cost as entered. (This ensures an issue price prior to the first APInvoice)

Thereafter the Average Cost is updated whenever either of these two types of transaction are entered:

  • Stock Purchase (AP Invoice)
  • Stock Value Adjustment

The calculation is made by taking the stock on hand resulting from the transaction, and then comparing this quantity with the quantity of the transactions itself. The quantity of the transaction is valued at the transaction rate, and the remainder of the stock on hand is valued at the existing average cost rate. This gives a new stock valuation and hence a new average cost.

For example, say a Stock Purchase of 100 @ $10 = $1,000 is entered and the result is a stock on hand quantity of 350. The existing Average Cost Rate is $8.

The value of the stock on hand is calculated to be:
(100 @ $10 = $1,000) + (250 @ $8 = $2,000) = $3,000

So the new Average Cost is $3,000 / 350 = $8.57

If the transaction quantity is actually greater than the current stock on hand, as may be the case if a purchase has been receipted into stock and issued before the AP Invoice is processed, then the new Average Cost is set to the transaction rate. i.e. All of the stock on hand is valued at the purchase rate.

  • Last Cost is not an acceptable method of stock valuation

The Following are extracts from FRS-4  *Accounting For Inventories: