PAS 2 INVENTORIES Cost formulas
INVENTORIES
are assets held for sale in the ordinary course of
business, in the of materials or in the rendering of
services process of production for such sale or in the
form or supplies to be consumed in the production
process
Inventories also encompass finished goods
produced, goods in process and materials and supplies
awaiting use in the production process.
Classes of inventories
Inventories are broadly classified into two, namely:
 Trading concern - is one that buys and seller goods
in the same form purchased.
 Manufacturing concern - is one that buys goods
which are altered or converted into another form
before they are made available for sale.
Cost of inventories
The cost of inventories shall comprise:
 Cost of purchase - the cost of purchase of
inventories comprises the purchase price, import
duties and irrecoverable taxes, freight, handling and
other costs directly attributable to the acquisition of
finished goods, materials and services.
 Cost of conversion - includes cost directly related to
the units of production such as direct labor.
It also includes a systematic allocation of fixed
and variable production overhead that is incurred in
converting materials into finished goods.
 Other cost incurred in bringing the inventories to
their present location and condition.
Costs excluded from the cost of inventories:
 Abnormal amounts of wasted materials, labor and
other production
 Storage costs (unless necessary in the production
process)
 Administrative overhead
 Distribution or selling cost
 Specific Identification –used for inventories
that are not ordinarily interchangeable,
segregated for specific projects.
Inv.,End x Actual Unit Costs
 FIFO (First in, First out) – the goods first
purchased are first sold.
Inv.,End x Recent Purchase
 Weighted average - the average unit cost is
computed by dividing the total cost of goods
available for sale by the total number of units
available for sale.
Measurement of inventory
PAS 2, paragraph 9, provides that inventories
shall be measured at the lower of cost and net realizable
value (LCNRV).
Net realizable value – is the estimated selling
price in the ordinary cost of business less the estimated
cost of completion and the estimated cost of disposal
Accounting for inventory writedown
If the cost is lower than net realizable value,
there is no accounting problem because the inventory is
stated at cost and the increase in value is not recognize
If the net realizable value is lower than cost, the
inventory is measured at net realizable value.
Allowance method
The inventory is recorded at cost and any loss
on inventory writedown is accounted for separately.
This method is also known as loss method
because a loss account "loss on inventory writedown" is
debited and a valuation account "allowance for inventory
writedown" is credited.
Disclosure
PAS 2, paragraph 36, requires disclosure of the
amount of any inventory written down and the amount
of reversal of the former if any.