Valuation of finished goods, semi-finished products and work in progress

The valuation of finished goods, semi-finished products and work in progress is an inherent part of proper bookkeeping. What are the correct methods of posting such events in the company’s ledgers then?

Finished goods, work in progress and semi-finished products are regulated by the Polish Accounting Act (Art. 3, section 19) and pursuant to the said Act, they are recognized as tangible current assets, namely: inventory.  

Products include: 

• finished goods 

• products of own agricultural and horticultural production 

• services suitable for sale, carried out but not accepted and not invoiced 

Semi-finished products include: 

• components intended for assembly or processing at later stages 

• elements that went through a particular production phase and can be used for further resale.  

Work in progress refers to: 

• products the production of which started but has not been finished, requiring further processing 

• services in progress 

Work in progress and semi-finished products are presented in one item in the balance sheet.  

Pursuant to Art. 17 section 2 of the Polish Accounting Act, the head of the entity decides on the choice of one of the auxiliary bookkeeping methods described below for the said groups of assets: 

• quantity and value records  

• quantity records 

• writing off the produced products as costs at the moment of their creation 

However, entities that choose the quantity and value variant also decide on the type of valuation price. These include: 

• the actual costs of manufacture, so-called variable valuation costs 

• fixed valuation costs.  

Current tangible assets are valued not less frequently than once in a year, as of the balance sheet date, according to the purchase price or manufacturing costs not higher than their net sales price as of the balance sheet date (Art. 28, section 1, point 6 of the Polish Accounting Act). Those are the general inventory valuation rules. Thus, the entity should adjust its recording system and principles to the characteristics of its operations in order to ensure a reliable determination of manufacturing costs of products.  

The Polish Accounting Act (Art. 28) provides for an exemption from the rule of valuation according to the manufacturing cost. Valuation based on net sales prices is allowed in the following situations: 

• when the cost of manufacture is higher than the net sales prices as of the balance sheet date 

• it is impossible to determine the cost of manufacture 

In such a situation, one should consider a revaluation write-off on tangible current assets.   

As of the balance sheet date, the value of tangible current assets, expressed at valuation prices, is consequently brought to the level of acquisition / purchase prices – in case of materials and goods – and to the level of costs of manufacture not higher than net sales prices. The above does not refer to finished goods, work in progress and semi-finished products, if their records involved the use of planned costs and the differences between the costs and the planned costs are negligible (Art. 34, section 2 of the Polish Accounting Act). In general, records use valuation prices and the determination of actual costs of manufacture is combined with determination of deviations. Such procedure leads to presentation of inventories as of the balance sheet date, at the amount of actual costs of manufacture.  

It can be assumed that the determination of valuation of finished goods, semi-products and work in progress is a complicated process composed of several components. It is then worthwhile to analyze the type and extent of operations in order to adjust the above-mentioned process to the company’s needs. 

Author: Magdalena Włodek, Manager at MDDP Outsourcing office in Warsaw 

Source: Accounting Act of 29 September 1994 (Polish Journal of Laws 2023.0.120)