Inventory Valuation: The Use of Market Prices.

Abstract This paper investigates the appropriateness of using market prices to value inventory, assuming different market and production conditions. If we assume that it is desirable to use "value" to measure inventory, the primary question asked in this paper is whether market prices are a good measure of value. The conclusion is that while market prices may be a good measure of value in some situations, in other situations they may lead to an over-statement of value. In considering the use of market prices, the article explores the relevance of average and marginal revenue and average and marginal costs for inventory valuation. In all the situations covered it assumes that the schedule of expected demand is known but that the exact number of units to be sold or that can be produced may be uncertain. The inventory consists of goods produced at time t to be sold at time t+1. The allocation of joint costs is a problem of continuing interest and importance both from the point of view of decision making and of recording economic events.