Inventory Valuation

[KBTS]

Just spoke to a prospective client this evening. He buys large lots of industrial parts at auction (both online and in person), liquidation sales, etc., and then resells the individual parts online. For example, he might buy a skid load of parts for $1,000 and re-sell the individual parts for $1,500. Since he does not always sell all the parts from each skid, he has inventory on hand and wants to know how to value this inventory. I told him I would do some research before we meet next week. I have some ideas but wanted to get other opinions from fellow board members. Thanks.

[JG EA]

Publication 538

Here is a couple of quotes from this pub:

"Items Included in Inventory
Your inventory should include all of the following. Merchandise or stock in trade.Raw materials.Work in process.Finished products.Supplies that physically become a part of the item intended for sale. Merchandise.

Include the following merchandise in inventory.
Purchased merchandise if title has passed to you, ....."

"Goods that cannot be sold.
These are goods you cannot sell at normal prices or they are unusable in the usual way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including secondhand goods taken in exchange. You should value these goods at their bona fide selling price minus direct cost of disposition, no matter which method you use to value the rest of your inventory. If these goods consist of raw materials or partly finished goods held for use or consumption, you must value them on a reasonable basis, considering their usability and condition. Do not value them for less than scrap value. For more information, see section 1.471–2(c) of the regulations."

[KBTS]

To clarify

Maybe I was not clear enough in the original post.

The lots that he buys are comprised of all different types of parts in the same lot - so there might be 25 different types of parts in a single lot of items. Some are worth more at resale than others. For example, out of the same lot, part "A" might sell for $200, while part "J" sells for $15. He needs to know how the value the remaining parts from each lot that he still has in inventory.

[OldJack]

He needs to know how the value the remaining parts from each lot that he still has in inventory.

Basically you determine a FMV for all items (the 25 different types). The FMV total will obviously be more than his total cost. You than determine the FMV % of each item to the overall total FMV and then allocate the total cost by the % for each item to allocate the cost to all items.