STATE UNIVERISTY OF ZANZIBAR (SUZA)

1. Introduction definitions
2. Measurement
3. Recognition
4. Disclosure

5. Questions

1. Introduction definitions

Inventories are assets:

a)

held for sale in the ordinary course of business;

a)

in the process of production for such sale; or

a)

in the form of materials or supplies to be consumed in the

production process or in the rendering of services

An asset is a resource controlled by the entity as a result of

past events and from which future economic benefits are
expected to flow to the entity.

2. Measurement

Inventories are stated at the

lower of cost of and net
realisable value.

Cost of Production:

Cost of
Purchase

Other
Costs

Cost of
Conversion

Cost of purchase comprises

i. purchase price
ii. import duties
iii. transport and handling costs
iv. any other directly attributable costs
v. less trade discounts, rebates and subsidies
vi. may include foreign exchange differences, which
arise directly on acquisition of inventories
invoiced in a foreign currency (refer IAS 21)

Cost of conversion comprises:

i. Costs, which are specifically attributable to units
of production, that is direct labour, direct expenses
and sub-contracted work.
ii. Production overheads: overheads incurred in
respect of materials, labour or services for
production, based on the normal level of activity,
taking one year with another.

Other costs may include overheads, attributable in

the particular circumstances of the business to
bringing the product or service to its present location
and condition, e.g. design costs.

Excluded costs: Usually selling expenses, general

administrative overheads, research and development
costs and interest costs are not considered to relate to
putting the inventories in their present location and
condition.

 Specify

the components attributable to the cost of

inventory
Cost formulae:

First in First Out (FIFO) formula

Weighted Average Cost formula

Prohibited

Treatment:

Last in First Out (LIFO) formula

Consistency

required across each type of inventory:

 FIFO:

the calculation of the cost of inventories on

the basis that quantities on hand represent the latest
purchases or production. This method assumes that
the oldest inventories are used up first.
Weighted
average cost: the calculation of
inventories by using an average price computed by
dividing the total cost of units by the total number
of such items.
An

entity needs to use the same cost formula for all

inventories of a similar nature and use to the entity

Which of the above cost categories do the following costs belong to?

Cost
Selling costs
Direct labour

Design of finished goods

Import duties on raw material
Fixed production overhead
Purchase of raw material
Abnormal amounts of wasted
material

Cost Category

Answer

Cost

Cost Category

Selling costs

Excluded

Direct labour

Cost of conversion

Design of finished goods

Other costs

Import duties on raw material

Cost of purchase

Fixed production overhead

Cost of conversion

Purchase of raw material

Cost of purchase

Abnormal amounts of wasted

material

Excluded

Question:
ABC trades in chocolates and made the following
purchases and sales in the period. There are 10 units left at
balance sheet date. Calculate the cost of stock using FIFO
and weighted average cost formulae
Transaction

Period

Quantity

Price

Total

Purchase

June

3 units

$ 20

$ 60

Purchase

July

7 units

$ 30

$ 210

Sale

August

4 units

Purchase

September

4 units

$ 40

$160

WAC

Answer:
FIFO: 4 at $40 plus 6 at $30 = 160 plus 180 = $ 340
Weighted average:
Transaction

Period

Quantity

Price

Total

Purchase

June

3 units

$20

$60

Purchase

July

7 units

$30

$210

Remaining
Sale

10 units
August

Remaining
Purchase
Remaining

$270

4 units

4 units
10 units

$27.0
$27.0

6 units
September

WAC

$162
$ 40

$27.0

$160
$322

$32.2

Measured at lower of : Cost and Net Realisable Value

Net Realisable Value

The estimated selling price in the
ordinary course of business less
the estimated costs of completion
and estimated costs necessary to
make the sale

Selling Price
X
Trade Discounts
(X)
Costs to Completion (X)
Marketing, Selling and
Distribution Costs
(X)
Net Realisable Value
X

Item
A
20
30
7
200

Cost
Selling price
Modification cost to enable sale
Marketing costs
Units held

A
Cost
NRV
Valuation
Quantity
Total value

20
23
20
200
4,000

B
9
12
2
2
150

Item
B
9
8
8
150
1,200

C
12
22
8
2
300

C
12
12
12
300
3,600

Total

8800

3. Recognition

Inventory is a current asset

Inventory is expensed
when the related revenue is recognised

What are the Dr and Cr involved in a sale of inventory?

The expense of a write down to NRV is recognised

when the write down occurs

 Inventory:

Dr Cost of Sales
100
Cr Inventory
100
Sale:
Dr Cash
150
Cr Sales
150
Write-down to NRV
Dr Profit and Loss Inventory write down
Cr Inventory

4. Disclosures

 Accounting

Balance

Income

policy

Sheet
Statement

Accounting policy:
identify cost formula used (FIFO or weighted average)
Cost components
Valuation (lower of cost or NRV)

Balance Sheet
Carrying amount of inventories (on face of BS)
Analyse inventories by classification (e.g. raw materials, finished goods etc)

Income Statement
Cost of inventories expensed in period
Expense of inventory write-downs included under other operating expenses

5. Questions