Within a trading firm, inventory is merchandise held for sale to customers into the ordinary course of business. In condition of manufacturing firms, inventory would mostly comprise materials required to manufacture the products that are: raw materials, materials remaining along with the factory at different stages of completion that are: work in process and goods ready for sale or finished goods. Apart from such there may be inventory of stores and supplies. Hence we have raw material inventory, finished goods inventory, work in process inventory and stores and supplies inventory.
This is common to refer to inventory as stock-in-trade and hence we could come across stock of raw materials, stock of finished goods and stock of work in process. Inventory is generally valued on the origin of "lower of cost or market price". Market price is considered to mean the cost of replacement either through purchase or through reproduction of the material in question. As a common principle, inventory cost includes all normal costs incurred to make the goods available in the place where this can be sold or utilized are, considered as costs of inventory.
In trading firms, inventory costs comprise freight-in, transit insurance costs, bring in or entry levies as also the invoice cost. Handling costs, warehouse costs, insurance costs in storage and interest costs are not incorporated as costs. They are considered as expenses of a period of the firm.
During the case of manufacturing units, the valuation of inventory costs is additionally complicated and involved. As a common rule all costs of materials, labour and plant needs used for manufacturing the goods are comprised in the valuation of inventory.
In valuing inventory on lower of cost or market price, care must be taken to notice that the valuation does not exceed the realizable value or selling price in the ordinary course of business.