Inventories

Question 1

What are the costs to be included/excluded in the inventory?

Answer 1

Costs incurred to move inventory from its purchased state to a point where it may be sold.

Costs that are recovered, such as vendor rebates, or discounts are netted against the cost of the inventory.

Once the inventory is in a condition where it can be sold, no additional costs can be added ~ storage and shipping costs to the customers are explicitly excluded from inventory

Question 2

What are some costs of manufacturing inventory included?

Answer 2

Raw material, direct labour and MOH.

Question 3

Explain conversion costs

Answer 3

Conversion cost is the required labour and material that is required to turn raw material into an intermediate or finished good.

Question 4

What is absorption costing?

Answer 4

Both IFRS and ASPE require absorption costing – inventory absorbs the cost of overhead.

This may include heat, electricity, depreciation of the facility, insurance, and indirect factory labor. All of these are allocated to inventory using a predetermined overhead rate based on a cost driver

Question 5

How do you adjust incorrect allocation of MOH?

Answer 5

If you have under-allocated:
Dr. COGS
Cr. MOH

If you have over-allocated:
Dr. MOH
Cr. COGS

Note: MOH is a temporary account that is eventually carried over to inventory. The above assumes that all inventory is sold - thus, closes out to COGS. If not:

Dr. MOH
Cr. COGS
Cr. Inventory

Question 6

Inventory cost flow assumptions (3):

Answer 6

FIFO, Weighted Average, LIFO

Question 7

How are adjustments in the cost of inventory realized?

Answer 7

Only Lower of NRV is allowed - inventory is not allowed to be written up unless you are reversing a previous write down.

Question 8

What are some important differences between IFRS and ASPE for inventory?

Answer 8

IFRS requires the capitalization of borrowing costs to be included in inventory, meanwhile ASPE allows companies to either capitalize borrowing costs or expense them.