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Short answer
Inventory valuation is the process of assigning a cost to the stock you hold at a reporting date. It rests on three decisions: which costs go into each item, which cost formula you use (specific identification, FIFO or weighted average), and whether any item must be written down below cost. Both IRS Publication 538 and IAS 2 expect cost to include everything directly and indirectly attributable to the item. This page is general information for lab and clinic staff, not accounting or tax advice.
Definition and scope
Valuation answers one question: what is the stock on the shelf worth in the books? For a lab or clinic that means reagents, consumables and supplies that are held for use or sale rather than equipment. The same stock quantity can carry different values depending on the cost formula and the write-down test applied, which is why finance teams ask procurement to document the method.
The U.S. IRS (Publication 538, inventories section) says that to value inventory at cost you must include all direct and indirect costs associated with it. IAS 2 (IFRS Foundation) measures inventories at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and sale.
Related pages: FIFO vs LIFO covers the two formulas in depth, days sales of inventory shows how a valuation feeds a turnover ratio, and medical inventory management software covers the systems that hold the quantities.
How it is used in practice: the three formulas
Specific identification
The IRS says to use specific identification when you can identify and match the actual cost to the items in inventory. IAS 2 requires it for items that are not ordinarily interchangeable. In a lab this describes lot-tracked or individually serialised items where each unit’s purchase cost is on record.
FIFO
First-in, first-out assumes the items purchased or produced first are the first ones sold or used, so year-end inventory reflects the most recent purchases (IRS Publication 538). IAS 2 lists FIFO as an allowed formula for interchangeable items.
Weighted average cost inventory
For interchangeable items IAS 2 allows “the first-in, first-out or weighted average cost formula”. Under weighted average cost, the cost of goods available (opening stock plus purchases) is divided by the total units available to give one average unit cost, and that average is applied to both units used and units left. The calculation below is the common periodic version of this arithmetic.
Worked example (illustrative numbers only)
These figures are invented for arithmetic illustration and are not prices of any real product. A generic consumable has an opening balance of 100 units at 10.00 each (1,000.00). A later purchase adds 200 units at 12.00 each (2,400.00). During the period 150 units are used.
| Measure | Weighted average | FIFO |
|---|---|---|
| Cost of goods available | 3,400.00 (300 units) | 3,400.00 (300 units) |
| Unit cost applied | 3,400.00 / 300 = 11.33 | Oldest layers first |
| Cost of 150 units used | 150 x 11.33 = 1,700.00 | 100 x 10.00 + 50 x 12.00 = 1,600.00 |
| Closing stock, 150 units | 1,700.00 | 150 x 12.00 = 1,800.00 |
Both methods account for the same 3,400.00; they split it differently between cost used and closing stock. Because prices rose in this example, FIFO leaves a higher closing value. The difference is a timing allocation, not a gain.
Choosing a cost formula
| Item type | Formula the sources point to | Source |
|---|---|---|
| Items not ordinarily interchangeable, where the actual cost can be matched | Specific identification | IAS 2; IRS Publication 538 |
| Interchangeable items (identical consumables) | FIFO or weighted average | IAS 2 |
| Items where the last purchased are assumed used first | LIFO, described by the IRS as complex and governed by Internal Revenue Code sections 472 to 474 | IRS Publication 538 |
This page makes no claim about whether LIFO is permitted under IFRS. Confirm the choice with your finance office and, for tax, the current IRS rules.
Where it matters for labs, clinics and supply decisions
What counts in cost
The IRS requirement to include direct and indirect costs means the purchase price is not necessarily the whole value. Ask finance which indirect costs your institution includes, and keep invoices so a unit cost can be traced.
The write-down test
Under IAS 2, stock is carried at the lower of cost and net realisable value. Under the IRS lower of cost or market method, you compare the market value of each item on hand on the inventory date with its cost, and each item is valued separately. The two tests are named differently; check which framework your institution reports under.
Checklist for lab stock
- Is each stock line interchangeable, or must a unit be traced to its own cost?
- Which single cost formula is applied to each class of interchangeable item, and is it documented?
- Which direct and indirect costs are included in the unit cost?
- Is each item compared with its write-down benchmark on the inventory date?
- Can the system export opening balance, purchases and issues so the arithmetic above can be reproduced?
For how reorder quantities interact with carrying cost, see the EOQ calculation guide.
Common misunderstandings
- “The method sets the real cost.” It only allocates a fixed total of cost between what was used and what remains.
- “Weighted average is an IRS method.” The weighted average formula named in this guide comes from IAS 2. The IRS retail method uses an average markup percentage of retail price, which is a different thing.
- “Cost means the invoice price.” The IRS expects direct and indirect costs.
- “One method for everything.” IAS 2 distinguishes interchangeable from non-interchangeable items.
FAQ
What is weighted average cost inventory?
A formula that spreads total cost over total units available to produce one average unit cost, then applies it to units used and units remaining. IAS 2 allows it, alongside FIFO, for interchangeable items.
Is inventory valued at cost or at market?
Both appear. IAS 2 uses the lower of cost and net realisable value; the IRS describes a lower of cost or market method where each item’s market value is compared on the inventory date.
Does valuation change what I actually spent?
No. It changes how the total is divided between expense and closing stock.
Sources
- IRS, Publication 538, Accounting Periods and Methods, inventories section: https://www.irs.gov/publications/p538 (checked 2026-11-03).
- IFRS Foundation, IAS 2 Inventories: https://www.ifrs.org/issued-standards/list-of-standards/ias-2-inventories/ (checked 2026-11-03).
