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MFRS 102 Inventories: Effective Date: 1 JANUARY 2012
MFRS 102 Inventories: Effective Date: 1 JANUARY 2012
INVENTORIES
EFFECTIVE DATE:
1 JANUARY 2012
MFRS102: INVENTORIES 1
Job-order costing
Objective of MFRS102
Objective : to prescribe the accounting treatment for
inventories.
A primary issue in this standard is to
1. determine the amount to be recognised as
asset and
2. amount to be charged as expenses against the
related revenue
MFRS102: INVENTORIES 3
Scope
This Standard applies to all inventories, except:
a)work in progress arising under construction contracts,
including directly related service contracts (see MFRS
111 Construction Contracts);
b)financial instruments (see MFRS 132 Financial
Instruments: Presentation and MFRS 139 Financial
Instruments: Recognition and Measurement); and
c) biological assets related to agricultural activity and
agricultural produce at the point of harvest (see
MASB ED 50 Agriculture).
MFRS102: INVENTORIES 4
Definition
MFRS102: INVENTORIES 5
Measurement
MFRS102: INVENTORIES 6
costs of
purchase
Direct Material
costs of Direct Labor
Cost of Material Cost
Inventories conversion
MFRS102: INVENTORIES 9
Costs of Conversion
The allocation of fixed production overheads to the
costs of conversion is based on the normal capacity
of the production facilities.
Normal capacity is the production expected to be
achieved on average over a number of periods or
seasons under normal circumstances, taking into
account the loss of capacity resulting from planned
maintenance.
The actual level of production may be used if it
approximates normal capacity.
MFRS102: INVENTORIES 10
Costs of Conversion
Actual production units <budgeted production units = use
budgeted production units
fixed overhead allocated to each unit of production is not
MFRS102: INVENTORIES 11
Costs of Conversion
Example 2:
AAN budgets that it will manufacture 500,000 units of windbreakers in
2016. The budgeted fixed production overhead is estimated at RM3 million.
The entity’s policy is to allocate fixed overhead based on units of production.
The actual units produced in 2016 is 400,000 units
How much cost should be allocated in 2016?
Units: 500,000
Fixed Production Overhead: RM 3M
Actual Unit: 400,000
Budgeted > Actual Use Budgeted Unit
MFRS102: INVENTORIES 12
Costs of Conversion
The pre-determined overhead allocation will be:
RM3,000,000 / 500,000 units = RM6 per unit
The fixed overhead allocated to the units produced in
2016 is RM6 x 400,000 = RM2.4 million
The RM600,000 that is not allocated is expensed off in
the statement of profit or loss.
Supposed in 2016, actual production was 600,000 units
and the actual overhead incurred was RM3 million.
The amount allocated to each unit is
RM3,000,000/600,000 = RM5 per unit
MFRS102: INVENTORIES 13
Cost Formulas
The purpose is how to assign the costs to the
various products in order to determine the cost of
sale and closing inventory.
Cost formulas can be used are:
1. Specific Identification Method
2. First in First Out (FIFO) Method
3. Weighted Average Method
MFRS102: INVENTORIES 14
Cost Formulas
1. Specific Identification Method
Applicable for products that are not interchangeable
and are segregated for a specific project.
The costs are assigned based on specific
identification method.
Examples – making special furniture and make to
order products.
MFRS102: INVENTORIES 15
Cost Formulas
2. First in First Out (FIFO) Method
The FIFO formula assumes that the items of
inventory which were purchased first are sold first,
and consequently the items remaining in inventory at
the end of the period are those most recently
purchased or produced.
MFRS102: INVENTORIES 16
Cost Formulas
3. Weighted Average Method
The cost of each item is determined from the
weighted average of the cost of similar items at the
beginning of a period and the cost of similar items
purchased or produced during the period.
The average may be calculated on a periodic basis,
or as each additional shipment is received,
depending upon the circumstances of the
enterprise.
MFRS102: INVENTORIES 17
COST
COSTFORMULAS
FORMULAS
MFRS102: INVENTORIES 21
Net Realisable Value
Example :
ABC has 100 units of product Y which it acquired for RM15 per unit. This inventory can
be sold at RM21 per unit and the selling cost is estimated at RM2 per unit. The net
realizable value of 1 unit is RM19 (RM21-RM2).
As the cost is less than NRV, the inventory will be disclosed at:
RM15 x 100 = RM1,500
Supposed the inventory damaged and could only be sold for RM10 each, the net
realizable value per unit will be RM10 less RM2 = RM8.
As the net realizable value is lower than cost, the inventory will accounted for at:
RM8 x 100 = RM800
The difference of change in the cost and the net realizable value = RM 15 – RM 8 = RM 7
RM 7 x 100 = RM 700
This needs to be expensed off in the book.
MFRS102: INVENTORIES 22
NET REALISABLE VALUE
Example 3:
AAN Sdn Bhd buys used cars, reconditioned them and sells
them. At the end of year 4, AAN Sdn Bhd provided the following
information on its year-end-stock of cars (inventory)
RM
Cost of five cars 40,000
Costs incurred on reconditioning the cars 25,000
Further costs to be incurred for the cars to be in 14,000
saleable condition
Selling price of reconditioned cars 103,000
Calculate the cost and net realisable value.
MFRS102: INVENTORIES 23
NET REALISABLE VALUE
The cost of the cars is:
RM
Cost of five cars 40,000
Costs incurred on work done 25,000
Total cost 65,000
RM
Selling price of reconditioned cars 103,000
Less: Costs to be incurred for the cars to (14,000)
be saleable condition
Net realisable value 89,000
MFRS102: INVENTORIES 24
NET REALISABLE VALUE
In a situation where an entity has numerous
quantities and variety of inventories generally
inventories may be written down to net
realisable based on item by item, group similar
or related items.
MFRS102: INVENTORIES 25
NET REALISABLE VALUE
Example 4:
AAN Sdn Bhd has the following items of inventory whose cost and
net realisable value is given:
MFRS102: INVENTORIES 27
NET REALISABLE VALUE
Item Group Cost (RM) NRV (RM) Cost
A 1 200 400 200
B 1 250 200 200
C 1 230 270 230
D 2 450 380 380
E 2 560 500 500
F 2 570 440 440
G 3 640 500 500
H 3 660 720 660
I 3 670 700 670
Total 3,780
MFRS102: INVENTORIES 28
NET REALISABLE VALUE
Item Group Cost Cost by NRV NRV by Cost
(RM) Group Group
A 1 200 400
B 1 250 200
C 1 230 680 270 870 680
D 2 450 380
E 2 560 500
F 2 570 1,580 440 1,320 1,320
G 3 640 500
H 3 660 720
I 3 670 1,970 700 2,000 1,970
Total 3,970
MFRS102: INVENTORIES 29
Reversal
NRV (X1): 100
Cost (X1): 50
Cost = 50 Amount of the inventory should appear in
the book.
MFRS102: INVENTORIES 30
Writing Down to Net Realisable Value
A fall in the price of raw materials and other supplies may
indicate the cost of the current finished goods exceeding
the net realisable value.
Selling price of Finished Goods > Cost:
Do not write down materials’ carrying value
Selling price of Finished Goods < Cost
Materials written down to NRV (when NRV is not available, use
replacement cost)
If in the future, the sale price increases, then the value of
these inventories is increased back to cost.
MFRS102: INVENTORIES 31
Example 6:
A manufacturer of biscuits has 100 kilograms of strawberry flavoured flour.
The cost of the flour is RM3 per kilogram. One kilogram of biscuit uses 500
grams of flour and the total cost of manufacturing a kilogram of biscuit is
RM5. The selling price was RM7. There were 250 kilograms of biscuits
remaining at the end of the year.
100 kg flour; cost per kg = RM 3
1kg biscuit: 500g flour: cost RM5/kg of bicuits
SP: RM 7/per kg of biscuits
Remaining: 250 kg biscuits
Suppose the selling price of the biscuit dropped to RM4.50 per kilogram.
As the price of the biscuit had declined the replacement cost of flour has
dropped to RM2 each. The costs of other material remain unchanged.
Should the carrying value of flour and biscuit be written down?
MFRS102: INVENTORIES 32
Solution:
Initially, the unsold biscuits will be disclosed at 250kg x RM5 =
RM1,250 (cost is lower than selling price).
When the selling price of the biscuits drops to RM4.50/kg, then the
unsold biscuits is disclosed at RM1,125 (250kg x RM4.50).
The carrying value will be written down from RM5 to RM4.50 per
kilogram.
As the total cost of the finished product cannot be recovered by the
sale price, the carrying value of the flour has to be written down. The
best measure is replacement cost.
Therefore, the carrying value of the flour =
RM2 x 100kgs = RM200
MFRS102: INVENTORIES 33
Special Situation
If the price of flour dropped down, do we need to
revise the price of the biscuits?
No, the concern is towards the finished goods, as it is
the products to be sold.
MFRS102: INVENTORIES 34
RECOGNITION AS AN EXPENSE
When inventories are sold, the carrying amount of
those inventories should be recognised as an expense
in the period in which the related revenue is
recognised.
The amount of any write-down of inventories to net
realisable value and all losses of inventories should
be recognised as an expense in the period the write-
down or loss occurs.
MFRS102: INVENTORIES 35
DISCLOSURE
Accounting policy adopted, including the cost formula used;
Carrying amount by category;
Carrying amount of inventories at NRV;
Amount s of any write-down of inventories recognised as an
expense in the period;
the amount of any reversal of any write-down that is recognised as
a reduction in the amount of inventories recognised as expense in
the period;
Circumstances that led to the reversal of a write-down;
Carrying amount of inventory pledged as security for liabilities;
Cost of inventory charged to expense for the period.
MFRS102: INVENTORIES 36
THANK YOU
Tutorial Questions:
Q1,3,6,8
MFRS102: INVENTORIES 37