Valuation of Precious Materials Inventory in Jewelry

The valuation of precious materials inventory is a critical issue for any jewelry business. Between price volatility, accounting requirements, and tax implications, managing this challenge demands rigor and methodology.

This guide presents the different valuation approaches, their implications, and best practices for optimal management of your precious inventory.

The Challenge: Why Valuation Is Complex

The Particularities of Precious Materials

Precious metals and stones are not like ordinary inventory:

The Business Stakes

Gross margin The valuation method directly impacts margin calculation. The same sale can show very different margins depending on the inventory valuation used.

Cash flow Precious materials inventory ties up significant capital. Good visibility on their value is essential for financial management.

Taxation Inventory valuation affects taxable income. Method choices have direct tax consequences.

Accounting Requirements

Accounting standards (PCG in France, IFRS for groups) impose strict rules:

• Valuation at acquisition or production cost
• Depreciation if current value falls below cost
• Consistent valuation method over time
• Documentation of choices and methods

Valuation Methods

Method 1: FIFO (First In, First Out)

Principle The first items received are assumed to be sold first. Remaining inventory is valued at the most recent purchase prices.

Example

Initial inventory: 100g purchased at €50/g = €5,000
Entry 1: 50g purchased at €55/g = €2,750
Entry 2: 50g purchased at €60/g = €3,000
Total inventory: 200g value €10,750

Outflow: 120g
- 100g at €50 = €5,000
- 20g at €55 = €1,100
- Cost of outflow = €6,100

Remaining inventory: 80g
- 30g at €55 = €1,650
- 50g at €60 = €3,000
- Inventory value = €4,650

Advantages

• Reflects actual physical flow (in theory)
• Inventory valued at recent prices
• Simple to understand

Disadvantages

• Artificially high margins when prices rise
• Heavy administrative burden (tracking lots)
• Can generate significant tax liabilities

When to use

• If you can actually trace lots
• If you want inventory close to current value
• If prices are stable

Method 2: LIFO (Last In, First Out)

Principle The last items received are assumed to be sold first. Remaining inventory is valued at the earliest purchase prices.

Note: LIFO is not permitted under IFRS and is discouraged under French PCG. Mentioned here for information purposes, it is rarely used.

Method 3: Weighted Average Cost

Principle At each entry, the average cost of total inventory is recalculated. Outflows are valued at this average cost.

Example

Initial inventory: 100g at €50/g = €5,000
Weighted Average = €50/g

Entry 1: 50g at €55/g = €2,750
Inventory: 150g value €7,750
New Weighted Average = 7,750 / 150 = €51.67/g

Entry 2: 50g at €60/g = €3,000
Inventory: 200g value €10,750
New Weighted Average = 10,750 / 200 = €53.75/g

Outflow: 120g
Cost of outflow = 120 × €53.75 = €6,450
Remaining inventory = 80g × €53.75 = €4,300

Advantages

• Smooths price variations
• Simple to calculate with computer systems
• Suitable for fungible materials

Disadvantages

• Less accurate with large price variations
• Inventory may deviate from actual value
• Recalculation at each entry

When to use

• For fungible materials (gold, silver)
• If you have frequent entries
• If you want to smooth variations

Method 4: Periodic Weighted Average

Principle A variant of weighted average where the average cost is calculated periodically (monthly, quarterly) rather than at each movement.

Advantages

• Simpler to manage
• Suitable if few movements
• Results comparable to weighted average

Disadvantages

• Less accurate during periods of high variation
• Time lag

Method 5: Standard Cost

Principle Entries and outflows are valued at a predetermined cost, revised periodically. Variances are treated separately.

Advantages

• Stability of cost prices
• Simplification of management
• Facilitates quote calculation

Disadvantages

• Variances to manage
• May diverge from reality
• Regular revision necessary

When to use

• As a complement for internal management
• To establish stable selling prices
• If prices are relatively stable

Application by Inventory Type

Gold Raw Material

Particularities

• Global reference price (London fixing)
• Fungible (one gram = one gram)
• Multiple forms (ingots, grain, alloy)

Recommendation Weighted average or periodic weighted average, with:

• Separation by grade (999, 750, 585...)
• Regular reference price updates
• Depreciation test if prices drop significantly

Precious Stones

Particularities

• Each stone is unique
• Individual certification
• Prices vary greatly by quality

Recommendation Individual identification preferred:

• Valuation at actual acquisition cost
• Stone-by-stone depreciation test if necessary
• For small stones: weighted average by quality/dimension category

Work-in-Progress

Particularities

• Mix of materials and labor
• Value increases through the process
• Risk of rejects

Recommendation

• Valuation at production cost (materials + direct labor + overhead)
• Progress updates
• Provision if non-conformity risk

Finished Goods

Particularities

• Full cost to determine
• Margin to preserve
• Possible depreciation if unsellable

Recommendation

• Valuation at full production cost
• Net realizable value test
• Depreciation if necessary

The Issue of Losses and Recoveries

Manufacturing Losses

In jewelry, losses are normal: filings, casting waste, sweepings...

Accounting treatment

• Integrated into production cost (normal loss rate)
• Provision if abnormal rate
• Tracking of actual vs standard rate

Recoveries

Waste is recovered and reintegrated into inventory.

Accounting treatment

• Inventory entry at recoverable value
• Deduction from initial production cost
• Tracking of recovered quantities

Yield Calculation

Rigorous tracking allows detection of anomalies and process improvement.

Inventory Depreciation

When to Depreciate

Depreciation is mandatory if:

• Current value is below cost
• Inventory is unsellable or obsolete
• Stones are damaged
• Designs are outdated

How to Calculate

For raw materials

• Compare to current price
• Depreciate if price is below weighted average cost

For finished goods

• Estimate net realizable value (selling price - selling costs)
• Depreciate if below cost

Tax Impact

• Depreciation is tax deductible
• It must be justified and documented
• Reversal is taxable if inventory regains value

Management Tools

What Your System Should Do

Essential functions

• Movement tracking (entries, outflows, transfers)
• Automatic weighted average or FIFO calculation
• Real-time inventory valuation
• Reference price integration

Advanced functions

• Lot separation and traceability
• Multi-grade management
• Loss and recovery tracking
• Variance alerts

Physical Reconciliation

Regular physical inventory is essential:

Managing Variances

Variances between physical and theoretical inventory must be:

• Documented
• Analyzed (cause of variance)
• Regularized in accounting
• Tracked over time (trends)

Tax Implications

Method Choice

The FIFO vs weighted average choice has direct tax consequences:

Important: Once chosen, the method must be maintained (principle of consistency). A change requires justification.

VAT on Precious Metals

Investment gold benefits from a specific VAT exemption. Gold destined for jewelry is subject to standard VAT.

Point of attention: The distinction must be clear and documented.

Capital Gains Regime

For old inventory with significant latent gains, specific tax regimes may apply. Consult your accountant.

Best Practices

1. Document Your Choices

Write an inventory accounting policy note:

• Chosen valuation method
• Justification for the choice
• Depreciation thresholds
• Inventory frequency

2. Separate Inventory

Maintain separate accounts for:

• Each metal type
• Each grade
• Raw materials vs work-in-progress vs finished goods
• Available vs reserved inventory

3. Automate Calculations

Manual Excel spreadsheets quickly reach their limits. Suitable software enables:

• Automatic and reliable calculations
• Movement history
• Instant reporting

4. Reconcile Regularly

Do not wait for the annual inventory to discover variances. Frequent checks allow quick detection and correction.

5. Collaborate with Your Accountant

Involve your accountant in:

• Method choice
• Procedure validation
• Valuation review
• Tax matters

How LIINK Helps with Inventory Management

LIINK integrates materials tracking features tailored to jewelry:

Lot traceability Each lot of material is identified and tracked from receipt to use.

Documented movements Entries, outflows, and transfers are recorded with dates and quantities.

Production integration Material consumption per order is automatically recorded.

Accounting export Inventory data can be exported for accounting integration.

Conclusion: Rigor as Protection

The valuation of precious materials inventory is not a theoretical exercise. It is a concrete operational, financial, and tax issue.

Companies that master this topic can:

• Calculate their margins accurately
• Manage their cash flow effectively
• Be confident in case of tax audit
• Make the right buying and selling decisions

Rigor in precious inventory management is not a luxury: it is protection.

Further Reading

• Gold and Diamond Inventory Management: Complete Guide for Jewelry Brands
• Gold Traceability in Jewelry: From Ingot to Finished Piece
• Precious Metals Due Diligence: Your Obligations in 2026

Need to better track your materials inventory? LIINK helps you trace your materials from receipt to delivery. Discover LIINK