Generally, inventory is the largest current asset of most businesses. The value of inventory is based on the costs incurred by the entity to purchase the inventory, make it ready for sale, and have it transported into the proper place for sale.
Inventory valuation is performed at the end of each accounting period.
The value of the ending inventory determines the cost of goods sold and therefore profit of the company.
The cost of goods sold (COGS) is calculated as follows:
COGS = Opening_Inventory + Purchased_Inventory - Ending_Inventory

Inventory Valuation Method

In FirstBIT ERP, inventory value and COGS are calculated based on the average weighted cost of all items on hand including those purchased during the accounting period. This method is referred to as the WAC (Weighted Average Cost) method.
Inventory valuation is performed at the end of financial period by the month-end closing process.
Once the month-end closing process is completed, the amount of cost of goods sold (COGS) is available for use in statements.
Example of using WAC
In June, at the company warehouse, there are 400 umbrellas whose total cost is $4000. During the accounting period (June), you purchased 100 umbrellas, $12 each.
Thus, your weighted average cost was ($4000 +$1200) divided by the 500. This resulted in $10.40 per umbrella.
During the period of June, you sold 200 umbrellas.
COGS = (200 x $10.40) = $2080
Ending_Inventory = (500-200) x $10.40 = $3120
In July, you purchased 300 umbrellas by $11 each.
The total cost of inventory became $6420 =($3120 +$3300). The weighted average cost of an umbrella is $6420/(300+300). This results in $10.70 per umbrella.
During the period of July, you sold 300 umbrellas with the ending inventory of 300 umbrellas. The ending inventory value would be $3210; the COGS = $3210.

Cost-Related Options

If you need to use estimated costs during the current month, you can select the Calculate Costs in Credit Notes, or Show Costs in Sales Documents, or both options on the Administration > Settings > Sales form. Then, the average weighted cost for the listed items will be calculated based on the data available on the date of the document.
To include the inventory valuation in the month-closing process, open Accounting > Service Tools > Month-End Closing form and make sure that the following options are selected among other options that are required by the accounting policies established in your company:

• Calculate Direct Costs: To calculate the direct costs according to the WAC method. If Calculate Costs in Credit Notes, or Show Costs in Sales Documents options are selected, the application will automatically correct costs in sales documents (with costs estimated during the period).
• Allocate Costs: To perform allocation of indirect costs including the manufacturing overhead.
• Calculate Actual Costs: To calculate the full costs of finished goods that were produced in the organization.