IAS 2 Inventories SSAP 9 Mr. BarryA-level Accounting Year12

Introduction INVENTORIES Mr. BarryA-level Accounting Year12

Inventory can include Raw Materials Materials used in production Work in Progress (WIP) Goods in the process of production Finished Goods Goods held for sale Mr. BarryA-level Accounting Year12

How to value stocks (Prudence) Stocks should be valued at the LOWER of -Cost OR -NRV (Net Realisable value) Also the valuation should not recognise profit in advance, but should account immediately for anticipated losses Mr. BarryA-level Accounting Year12

NET REALISABLE VALUE Expected Selling price less any expenses necessary to sell the product Mr. BarryA-level Accounting Year12

COST That expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition. This expenditure should include, in addition to the cost of purchase such costs of conversion as are appropriate to that location and condition Mr. BarryA-level Accounting Year12

Cost of Purchase Comprises purchase price including import duties, transport and handling costs and any other directly attributable costs, less trade discounts, rebates and subsidies Mr. BarryA-level Accounting Year12

Cost of Conversion Comprises: – Costs which are specifically attributable to units of production. – Production overheads – Other overheads, if any, attributable in the particular circumstances of the business in bringing the product or service to its present location and condition Mr. BarryA-level Accounting Year12

MEASUREMENT & COST Fixed Production overheads: are those indirect costs of production that remain relatively constant regardless of the volume of production, eg the cost of factory management and administration. Variable Production overheads: are those indirect costs of production that vary directly, with the volume of production, eg, indirect materials and labour. Mr. BarryA-level Accounting Year12

What NOT to include in the cost What NOT to include in the cost of inventories: Abnormal amounts of wasted materials, labour or other production costs Storage Costs (except costs which are necessary in the production process before a further production stage) Admin Overheads not incurred to bring inventories to their present location and condition Selling costs Mr. BarryA-level Accounting Year12

Cost formulas: 1)First in – first out ( FIFO) 2)Weighted average Under IAS 2 LIFO MUST NOT BE USED Mr. BarryA-level Accounting Year12

NET REALISABLE VALUE Situations when NRV is likely to be less than cost: 1) An increase in cost or a fall in selling price 2) A physical deterioration in the condition of the stocks 3) Obsolescence 4) A decision as part of the company’s marketing strategy to manufacture and sell products at a loss ( Loss leader) 5) Errors in production or purchasing NRV must be reassessed at the end of each period and compared again with cost. On occasion a write down a NRV may be of such size, incidence or nature that it must be disclosed separately. Mr. BarryA-level Accounting Year12

Pricing of Stocks 1.First In, First Out (FIFO) 2.Last In, First Out (LIFO) 3.Average Cost (AVCO) Mr. BarryA-level Accounting Year12

Pricing material issues The same materials are sometimes bought at different times and at different prices. A systematic approach is required to price issues and value the remaining stock. Different systems have been developed to regularise material pricing. Mr. BarryA-level Accounting Year12

1. First In First Out (FIFO) The FIFO system operates on the basis that issues are priced as if the oldest materials were being issued each time. In a time of changing prices (e.g.inflation), issue prices may be out of date, while stock valuations should be more in line with current prices Mr. BarryA-level Accounting Year12

2. Last In First Out (LIFO) The LIFO system operates on the basis that issues are priced as if the more recent materials purchased were being issued each time. In a time of changing prices (e.g.inflation), stock valuations may be out of date, while issue prices should be more in line with current prices. Mr. BarryA-level Accounting Year12

3. Weighted Average (AVCO) Unlike LIFO and FIFO, the AVCO system does not track batches of materials purchased, but works out a weighted average cost for material held before each issue and costs accordingly. In a time of changing prices (e.g. Inflation), AVCO is a compromise between FIFO and LIFO, both in issue costing and stock valuation. Mr. BarryA-level Accounting Year12