A

Question 1

Cost included in inventories (costs of purchase, conversion, other costs in bringing inventories to their present location and condition)

Answer 1

“all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.”4 “

Excluded: Waste: Abnormal Cost
Administrative overhead and selling

(excluded because inclusion could distort gross profit)

Question 2

Costs recognized as expenses in the period in which they are incurred (Total costs that should be expensed)

Answer 2

Costs expensed:

Waste: Abnormal Cost
Administrative overhead and selling

Question 3

Costs of Purchase

Answer 3

Costs of purchase: “purchase price, import and tax-related duties, transport, insurance during transport, handling, and other costs directly attributable to the acquisition of finished goods, materials, and services”. Costs of purchase are reduced by trade discounts and rebates

Question 4

Costs of Conversion

Answer 4

“The costs of conversion include costs directly related to the units produced, such as direct labour, and fixed and variable overhead costs.5 Including these product-related costs in inventory (i.e., as an asset) means that they will not be recognised as an expense (i.e., as cost of sales) on the income statement until the inventory is sold.”

Question 5

Exclude the following costs (which are recognized as expenses in the period which they are incurred)

Answer 5

“exclude the following costs from inventory: abnormal costs incurred as a result of waste of materials, labour or other production conversion inputs, any storage costs (unless required as part of the production process), and all administrative overhead and selling costs. These excluded costs are treated as expenses and recognised on the income statement in the period in which they are incurred.”