Chapter 21 - Inventories - IAS 2 Flashcards
Cost of inventory includes all costs incurred in relation to the purchase and conversion of goods.
IAS 2 defines cost as “all costs of purchase, costs of conversion and other costs incurred in bringing
the inventories to their present location and condition.”
What does costs of purchase include?
The cost of purchase includes the following items:
• purchase price,
• import duties,
• other taxes that are not recoverable,
• transport costs,
• any costs directly attributable to purchases, e.g. handling costs.
The purchase cost can be reduced by trade discounts, rebates and any other item that can be
deducted to determine the purchase cost.
What are conversion costs?
The cost of inventory may include the cost involved in converting the raw material to finished
goods. These conversion costs relate to the production process.
How are indirect production costs (also known as production overheads) allocated to inventory?
Indirect production costs (also known as production overheads) are allocated to inventory on the basis of normal capacity.
Give an example of indirect production costs (also known as production overheads).
Indirect production costs include depreciation of product machinery, production supervisors’ salaries and machine maintenance.
What’s a key rule with inventory?
Any other costs are only included in the valuation of inventory if they are necessarily incurred in “bringing the inventories to their present location and condition”.
The general rule is that non-production costs are not included in the valuation of inventory.
The only exception to this would be costs incurred that specifically relate to the item of inventory; an example of this would be cost of designing a product for a specific customer may be included in the cost of inventories.
IAS 2 specifically excludes what items from being included in the cost of inventories?
IAS 2 specifically excludes the following items from being included in the cost of inventories:
(a) abnormal amounts of waste materials, labour or other production costs;
(b) storage costs other than those that are necessary as part of the production process before a
further production stage;
(c) administration overhead; and
(d) selling costs.
What is Net realisable value (NRV)?
Net realisable value (NRV) is selling price less costs that have to be incurred to achieve the selling
price.
NRV is used when:
• inventory is damaged,
• goods have become obsolete, or
• selling prices have deteriorated.
Explain the rules in relation to a reversal of write-down to net realisable value?
If an item of inventory has been written down to net realisable value in one reporting period and is
still on hand at a later date and the selling price has improved, the previous write-down can be
reversed.
The amount of the reversal is limited to the amount of the original write-down – the item
cannot be carried at an amount greater than its original cost.
