IAS 2

INVENTORY CHAP 13
 Learning Outcomes
•When to recognise inventory
•How to measure inventory initially
•Subsequent measurement of inventory
•Derecognition during sale
•Disclosure in the F/S in terms of IAS 2
Measurement: end of year
• Lowest of:
• Cost
• NRV
Manufacturing cost
Raw material
Balance WIP
Purchases Balance EX 11

Work in progress
Balance Finished goods
Raw material Balance
Direct labour
Overheads

Finished goods
Balance Cost of sales
WIP Balance
Fixed and variable costs

Variable cost
Changes as units change

Example?
Fixed and variable costs
Fixed cost
Stays constant regarless of units produced

Example?
Manufacturing cost

Raw material

Direct labour

Variable
overheads

Fixed overheads
Fixed costs
Allocation rate

Fixed man cost

Normal production vol
= Rate per unit
Fixed costs

Fixed cost = R100 000

Normal vol = 50 000
Actual vol = 25 000

Rate =
R100 000/50 000
=R2 per unit
Fixed cost
Fixed overheads
Bank 100 0000 WIP (2*25 000) 50 000

Work in progress
Balance Finished goods
Raw material Balance
Direct labour
Var overheads Allocated fixed overheads
Fixed overheads 50 000
Fixed cost
Three scenarios

• Actual production = Budgeted production

• Actual production < Budgeted production

• Actual production > Budgeted production

Fixed cost (Under)
Fixed overheads
Bank 100 0000 WIP (2*25 000) 50 000

COS (expense) 50 000

Work in progress
Balance Finished goods
Raw material Balance
Direct labour
Var overheads
Allocated fixed overheads
Fixed overheads 50 000
Under prodution

Balance remains in fixed overhead acc

Indicates ineffective production and is
recorded as an expense
Why?
Under prodution
Because ineffective production does not lead to future
economic benefits!!! (Framework)

Allocated overheads included in production cost per unit

RM per unit
+
Direct labour per unit
+ Variable overheads per unit + Allocated overheads per unit
Fixed cost (Over)
Fixed overheads
Bank 100 0000 WIP (2*60 000) 120 000

Work in progress
Balance Finished goods
Raw material
Direct labour Balance
Var overheads
Fixed overheads 120 000

Allocated fixed overheads

Fixed cost (Over)
Fixed overheads
Bank 100 0000 WIP (2*60 000) 120 000

WIP 20 000

Work in progress
Balance Finished goods
Raw material Fixed overheads 20 000
Direct labour Balance
Var overheads
Fixed overheads 120 000

Allocated fixed overheads

Over production
Allocated more than actually incurred

Actual overheads included in production cost per unit

RM per unit
+
Direct labour per unit
+ Variable overheads per unit + Actual overheads per unit
Fixed cost (Under)
Fixed overheads
Bank 100 0000 WIP (2*25 000) 50 000

COS (expense) 50 000

Work in progress
Balance Finished goods
Raw material Balance
Direct labour
Var overheads
Allocated fixed overheads
Fixed overheads 50 000
Fixed cost (Over)
Fixed overheads
Bank 100 0000 WIP (2*60 000) 120 000

WIP 20 000

Work in progress
Balance Finished goods
Raw material Fixed overheads 20 000
Direct labour
Var overheads Balance
Fixed overheads 120 000

Allocated fixed overheads

Fixed cost (Over)
Fixed overheads
Bank 100 0000 WIP (2*60 000) 120 000

WIP 20 000

Work in progress
Balance Finished goods
Raw material Fixed overheads 20 000
Direct labour
Var overheads Balance
Fixed overheads 120 000

Allocated fixed overheads

Other costs

• Ex 21 – Self study
Cost formulae
FIFO – First bought – sent for production first,
completed first, sold first
EX 27

WA – Average purchases sent for production, average

completed and average sold
FIFO
Raw material
Balance (10 000 units) (R1) 10 000 WIP (15 000 units) 17 500
Bank (10 000 units) (R1.5) 15 000

Work in progress
Balance (1000 units) (R1.2) 1 200 Finished goods (10 000 u) 10 200

Raw material (15 000 u) 17 500

Finished goods
Balance (500 units) (R1.3) 650 COS (9 000 u) 9 350
500 x 1.3 = 650
WIP (10 000 u) 10 200 1000 x 1.2 = 1 200
7500 x 1 = 7 500
WA
Raw material
Balance (10 000 units) (R1) 10 000 WIP (15 000 units x 1.25) 18 750
Bank (10 000 units) (R1.5) 15 000 (10 000 + 15 000)/20 000 = 1.25

Work in progress
Balance (1000 units) (R1.2) 1 200 Finished goods (10 000 u x 1.25) 12 500

Raw material (15 000 u) 18 750 (1200 + 18 750)/16000 = 1.25

Finished goods
Balance (500 units) (R1.3) 650 COS (9 000 u x 1.25) 11 250
(650 + 12500)/10 500 = 1.25
WIP (10 000 u) 12 500