Ch5: Depreciation

Question 1

What goes into the cost of merchandise inventory?

Answer 1

Cost of purchase, shipping costs to receive the merch, and import duties and any other unrecoverable costs.

Question 2

What goes in the cost manufacturing inventory?

Answer 2

Raw materials, DL, and MOH.

Question 3

Explain conversion costs.

Answer 3

They are the amount of DL and MOH required to turn, hence convert, raw materials into a product.

Question 4

Explain how overhead costs are allocated to inventory.

Answer 4

MOH compromise of VC & FC . Both frameworks require entities to “absorb” MOH costs to inventory. Examples include the likes of utilities, depreciation of the facility, insurance, and indirect factory labor (ex: plant supervisor). MOH are allocated to inventory using POHR (predetermined overhead rate) based on a cost driver (ex: machine hours or units produced). POHR is usually estimated at the beginning of the period.

Question 5

How do you calculate POHR? What happens if the estimated figures are inaccurate?

Answer 5

POHR = Total estimated OH costs / normal volume of the cost driver at normal capacity. When overhead is over or under allocated, variance should be adjusted through COGS.

JE:
Under-allocated
DR. COGS
CR. Manufacturing overhead (temp. account)

Over-allocated
DR. Manufacturing overhead (temp. account)
CR. COGS

If not all inventory has been sold;
DR. Man. OH
CR. COGS
CR. Inventory (for the portion that’s not sold)

Question 6

Identify and explain the major two methods businesses can adopt to account for the flow of their inventory.

Answer 6

FIFO - old inventory are sold first and what remains at year-end are the newest inventory.
Weighted average cost method - [(Beginning inventory cost + Cost of purchases to date) / (Quantity of inventory in beginning inventory + Quantity of purchases to date)]. The WAC is then applied to the units in ending inventory and COGS.

Question 7

How should inventory be carried on the balance sheet of a business?

Answer 7

Inventory should be carried at the lower of cost or NRV (net realizable value).

Question 8

Explain what NRV is.

Answer 8

NRV is the value that the business could realize through the “ordinary” sale of the inventory. in other words, it’s the proceeds less selling costs (AKA fair market value less selling costs).
Write-downs to NRV are typically done on an item-to-item basis, but grouping them together is permissible as long the products are related.

Question 9

What is the major difference between ASPE and IFRS in terms of accounting for borrowing costs?

Answer 9

ASPE does not require borrowing costs to be capitalized, unlike IFRS, it allows companies to either capitalize or expense borrowing costs.