In: Accounting
Your audit client, a manufacturer of surgical gloves, wants to increase the value of its inventory even though it has not experienced any changes in manufacturing costs. Your client explains that it wants the value of its inventory to reflect the fact that it can now charge a higher price for these high demand items. Is this permissible under U.S. GAAP?
No, valuation of inventory at a higher price than cost is not permissible. As per US GAAP the inventories are valued at lower of cost or market value. The cost of inventory includes all the cost incurred in purchasing the inventory and bringing the inventory to its present location and condition. The market value is defined as the current replacement cost as limited by net realisable value. The net realisable value is the equal to estimated selling price less estimated reasonable cost incurred in selling the inventory. The valuation of inventories at lower of cost or market value is in line with the concept of prudence.
The cost of manufacturing inventory shall include direct material, direct labor, manufacturing overheads, the sum total of which is product cost. The higher price charged because of increase in demand increases the market value of the inventory. So inventories has to be valued at manufacturing cost only in line with US GAAP