Adjusting Weighted Average Inventory Valuation when costs have risen

Are you using QBO or QBD?

@jkenfield 

When costs have risen you don't adjust the value of existing inventory.  In accounting, inventory is valued at your historical cost (cash paid at the time of purchase, not current fair market value) and QB uses average cost to come up with that valuation.  Therefore, you don't make any adjustments other than increasing the cost of the items when you receive new inventory.  That will increase your balance sheet valuation of inventory as you bring in the higher-priced inventory and your COGS will also increase as you sell some of that higher-priced inventory.   

So even thought we sold all the inventory that was at a lower cost and are now selling inventory at only the higher price there is no adjustment that can be made? I don’t track my inventory in QuickBooks. I do it manually in a spreadsheet. I use QBO. I was hoping there was a end of year type reconciliation I could use to make the value match the actual cost  

I use QBO so I track my inventory outside of QB in an excel spreadsheet that uses average cost for inventory value.  I reconcile my Raw Materials and Finished Goods accounts each month and there is a unaccounted valuation change whenever a purchase is made for material at higher price. I’m not sure how to reconcile that in QB - currently I have it going to an expense account called valuation change but that doesn’t seem correct 

@jkenfield 

There are no expense adjustments when tracking inventory to compensate for the change in cost.  It is all taken into account with the value of your beginning and ending inventory, purchases of inventory, and the cost of labor to prepare the inventory for sale.

I assume you know most of this: Your inventory can be valued in one of four ways: specific ID (impractical), FIFO (first in, first out), LIFO (last in, first out) or weighted average cost (WAC).  If you're using WAC, then you average the cost of every single item you purchased throughout the year and use that average cost to come up with your ending inventory number.  If you purchased 10 items at $1 and 10 additional, same items for $2, you will use $1.50 as the WAC for that item when valuing your ending inventory. If there are 5 left at year-end, that item's value is $7.50 (5 x $1.50).

Then, COGS is calculated by taking your beginning inventory, adding the cost of inventory purchased throughout the year (and the cost of labor), then subtracting your ending inventory.  The beginning and ending inventory values are based on the WAC which includes your higher-priced items.  And, the purchases made throughout the year will be recorded at your higher cost which will raise your COGS expense.  That will take everything into account and there should be no additional adjustments that need to be made.

So there is no "shoring up" at end of year to get more accurate costs in the weighted average?  

I still don't know what to do with the accounting entry to keep my spreadsheet and QB accounts matching.  For instance, on month my Raw materials account is valued at $1200 in QB but when I make a purchase the next month and the average cost of my materials goes up that value my spreadsheet is now say $1250.  What do I apply the $50 to in QB?  I currently have a contra expense account called Valuation Change that I apply it to but I am not sure this is correct.  Thanks for your advice!

@jkenfield 

The total value of your inventory (both on your spreadsheet and in QB) should always match the WAC of each item times the # of items you have in inventory.  For example, if you purchased, over 3 consecutive weeks:

Week 1 - 10 items @ $5/ea = $50 total.  WAC = $5.00

Week 2 - 10 items @ $6/ea = $60 total.  WAC = $5.50 = ($50 + $60) / 20

Week 3 - 10 items @ $7/ea = $70 total.  WAC = $6.00 = ($50 + $60 + $70) / 30

After the week 3 purchase, you now have 30 items in stock that you paid $180 for and your WAC is $6.00. So, the value of your inventory should be $180, both on your spreadsheet and QB, because that is what you paid for it ($50 + $60 + $70) and it's also the total of the WAC times the 30 items in inventory ($6 X 30). I'm not sure I understand why you have a $50 discrepancy between your spreadsheet and the inventory value in QB.