Inventory Valuation

[geekgirldany]

I need some suggestions on inventory for a home decor business. They buy misc items like floral stems, foam, baskets, etc to make floral arrangements. How should these floral arrangements be valued at the end of the year? Is it basically a estimate of wholesale value?

[Golden Rocket]

Cost

Dany - this inventory should be valued at the taxpayer's purchase cost. This should include freight and all cost that comes with it to the premises, but not costs which occur after the goods are delivered. This is the most direct way to value the inventory.

There are gross profit percentage methods, which are quite indirect and also theoretical. Example: I have a partnership operating a Sporting goods retail store. Their plan is to sell all their merchandise for 50% above cost. You would thus ascertain that if their inventory is valued at $150,000 ticket price, their inventory valuation would be $100,000.

However, records from the last 3 years indicate that for every $150,000 in sales, there is over $115,000 in cost. That's because the 50% markup does not include theft, promotion, pilferage, discounts, etc. We count inventory and value it at cost every year.

[geekgirldany]

I guess I am just not understanding.

If they buy say a bunch of flower stems for $10.00, 5 pieces of foam for $5.00, 5 bags of moss for $5.00.... then how are these costs put towards the flower arrangement. They are actually making the flower arrangement. They might use half a bag of moss, divide the pieces of foam, and use flower stems from one bunch and another bunch. When doing ending inventory and they have several floral arrangements left over how do you put a cost to it? Do they need to come up with a recipe card of sorts listing what all went into the arrangement and try to price the costs that way? I can see how they could price the flower stems but the pieces of foam and bags of moss I don't.

[BOB W]

I guess I am just not understanding.

If they buy say a bunch of flower stems for $10.00, 5 pieces of foam for $5.00, 5 bags of moss for $5.00.... then how are these costs put towards the flower arrangement. They are actually making the flower arrangement. They might use half a bag of moss, divide the pieces of foam, and use flower stems from one bunch and another bunch. When doing ending inventory and they have several floral arrangements left over how do you put a cost to it? Do they need to come up with a recipe card of sorts listing what all went into the arrangement and try to price the costs that way? I can see how they could price the flower stems but the pieces of foam and bags of moss I don't.

You are on the right track with using a "receipe". Allocating costs is the way it is done. You can look at it as> Raw materials, goods in progress and finished goods.

When an inventory is done for a Sand & Gravel business, they take measurements. If a pile of sand is cone-shaped they use a formula by measuring the height and base circumference to find the volumn by sq ft or sq yards, even tons.

Inventory is made up of pieces, pieces and more pieces. Some of those pieces are whole and some are just raw material PIECES of whole units. If a whole unit is $10.00 and you have half of of that unit left, it is valued at $5.00. If you have a "finished good" that is made up from raw material stock, you need to know what parts went into that finished good and cost it out accordingly.

[geekgirldany]

So similar to inventory for a manufacturing business.

[BOB W]

Yep............................................

[Golden Rocket]

Reality

A manufacturer (i.e. one who produces the proverbial "widget") has a bill of material for every product it produces. It is thus possible to simply calculate the cost of each product by extending and adding all of the components. It follows that the cost of each component must be known.

The sophistication involved in a bill of material is hardly in practice for a corner florist, but the theory is the same. Any florist who has been in business very long can look at one of their flower arrangements and tell you within a dollar how much their cost is. Their ability to do this would probably be closer to real cost than any method used by an accountant or IRS auditor.

[DTS]

Dany

I have been involved with 4 florists for over 28 years. Each one has varying degrees of size and success and how they find the ending inventory. One of these four florists purchases goods only "per arrangement", so her ending inventory is almost $0. The others don't have this luxury.

As GR states, each one of them can truly glance at any arrangement they make and tell you, within a dollar, what it costs to produce this arrangement. Three of the four have costs for each item written down on an inventory sheet from purchase slips and at the end of the year, they go through each item remaining in the shops to give them their ending inventory.

Example: They know that a large box of oasis costs $XXX and they have 38 out of 100 units of oasis left in that box remaining. If there is a 1" piece of oasis left after shaving or cutting it, there is no way they can or are going to use this, so in the trash it should go, as would the cut stems of flowers. It's waste and has been accounted for in the purchases.

The same goes with every item in the shop, from wire to ribbon. After seeing this inventory taken many times, I can guarantee you that they accurate, within pennies.

I have not done the method Bob W gave you and it's my understanding there is an allocation of some sort between COGS and something else (?) using this method. Sounds very complicated, but that's only because I've never had to do this. The method I've described for you will get you there, as well.

I hope this helps you in some way.

Dennis

[BOB W]

I have not done the method Bob W gave you and it's my understanding there is an allocation of some sort between COGS and something else (?) using this method. Sounds very complicated, but that's only because I've never had to do this. The method I've described for you will get you there, as well.

I hope this helps you in some way.

Dennis

The reason for my detailed explanation was for "concept" knowledge. And I agree, that a florist would be much simpler.

[DTS]

Hi Bob

For the future, if I should encounter this, how do manufacturers figure this method? Like I mentioned, this allocation, if I understood it correctly, sounded very complicated to me when I was discussing this with a colleague.

Dennis

[geekgirldany]

Thank you all very much for posting. Clears things up for me.

Thank you for your input Dennis on your experience with florist. My customers are into home decor and this is a new business for them. I did some research on google last night trying to find some more information. The only thing I found was a actual accounting program for florists. It said the program used "receipes" for arrangements that employees can look at so that they don't over stuff the arrangement. Plus it tracks the cost. That is were I got the idea for a receipe card and might be a good way to explain to my customers.

[Gretel]

Yes, I really like the "recipe" idea. Will stick in my mind forever now.

[DTS]

Recipes

Dany,

First, I did not want to imply I was a "florist" expert! Don't know why I even put that in my post other than I was thinking how long I had watched these gals do this. I was a little embarrassed after I reread it!

I may have misread your post or did not understand it at first, but did after your reply. My misunderstanding was that you were trying to figure out the ending inventory...period. Sorry if I got way off track with that!

That is a good suggestion for the recipes. Thinking about this, I remember being told at one time that national chains, such as Conroy's, have these "recipes" for their employees to follow, right down to the number of flowers, bowls, moss, etc. No reason your home decor people couldn't do the same thing.

Maybe, you can use some bits from all the posts to help your customers come up with an accurate way of determining the cost for these.

Dennis

[BOB W]

For the future, if I should encounter this, how do manufacturers figure this method? Like I mentioned, this allocation, if I understood it correctly, sounded very complicated to me when I was discussing this with a colleague.

Dennis

I have no idea what the formula is to measure sand, dirt, and anything that creates a pile. But each pile, if you are to determine tonage, will have various densities. So you need to take a sample with a know volumn and weight it. Then apply that weight to the volumn that the pile measures out to.

If you buy the sand, dirt, etc by the yard then you just measure the volumn. If you own the sand pit you would use a depletion factor plus cost of extraction per yard as cost. Should I go on?????????? I'm not.........................

[DTS]

Bob

Well, that's a start. I believe it's tied to UNICAP, if I'm not mistakened?? I can take your info and do some research in the future and, maybe, make some sense of it with the help of your post.

No, please don't go on and on! Much more and I'd need a drink!

Thanks,

Dennis