Inventory Flashcards
Inventory should be measured at the lower of:
- NRV
- Cost
What is NRV
the value that the company could realize through an ordinary sale of the inventory
Proceeds - selling costs
Costs included in merchandise inventory
- any costs incurred to bring the inventory to its present location and condition
- Cost of purchase
- shipping costs to receive the merchandise
- import duties and any other unrecoverable taxes
Once in condition that it can be sold, no further costs can be added
Costs included in manufacturing inventory
- raw materials
- direct labour
- manufacturing overhead
Conversion costs
the amount of direct labour and manufacturing overhead costs that are required to turn raw materials into a product
Raw material: costs to include
same as merchandise inventory
Direct labour: costs to include
added to the cost of inventory as incurred
Overhead costs consist of
- costs to operate the manufacturing facility - heat, electricity, depreciation of the facility, insurance, indirect factory labour
How are overhead costs allocated to inventory?
- allocated using a predetermined OH rate
- estimated total OH costs / normal volume of cost driver at normal capacity
when underallocated - DR COGS,
under allocated, CR COGS
If inventory remains at the end of the period, allocate the variance b/w inventory and cogs: CR COGS (variance \* sold/total) CR Inventory (variance \*remaining/total)
Inventory cost flow assumptions…
- Specific identification
- FIFO - when inv is sold, oldest inv gets moved to COGS
- Weighted avg cost
Weighted avg cost flow method
= (Beg inv + purchases)/ (Q beg inv + Q purchases)
weighted avg cost per unit is applied to the units in end inv and cogs