Inventory Initial Measurement

INVENTORIES PAS 2, paragraph 6 INVENTORIES Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or supplies to be consumed in the production. process or in the rendering of services. Assets held for sale in the ordinary course of business. Assets in the production process for sale in ordinary course of business. Materials and supplies used in production, Purchased subcomponents. Goods held by a trader for resale. INITIAL MEASUREMENT: Cost Lower of Cost and Net Realizable value SUBSEQUENT MEASUREMENT: MERCHANDISING BUSINESS Merchandise Inventory Supplies Finished Goods Inventory Classification: МАМИРАСТTURING BUSINESS Work-in-Proness Inventory Raw Materials Inventory Supplies Work-in prosess Inventory. МАМИРАСТURING BUSINESS INITIAL MEASUREMENT: COST OF INVENTORY Cost of Purchase Cost of Conversion Purchase Price Freight and Handling cost Import Duties and irrecoverable taxes Insurance while inventories are in transit Broker's Commission Storage Cest variable factory overhead Fixed factory overhead Dirget Laber Notel Purchase price is reduced by Trade discount, rebates, and cash discounts. value-added tax is a recoverable tax, thus, it is generally not capitalized as cost. Foreign exchange differences is not included in tine cost. Note! unallocated Fixed Factory Overhead are expensed and not capitalized. variable Factory overhead are costs that change as the volume of production changes, or the number of services provided changes. For example, production supplies, Raw materials, commissions and delivery. Fixed Factory overhead are costs that do not change even while the volume of production activity changes. For example, equipment depreciation, rent of the facility. Other Costs Other costs that are NECESSARY in bringing inventories to the present location and condition are included as cost, etherwise it should be expensed. For example, borrowing costs under PAS 23 which requires substantial time to create an asset. Another is the storage cost if a product requires substantial amount of time to create the asset Treated as Expense: Abnormal Costs Interest cost Administrative Expenses Selling Expenses value-added tax Handling & Storage cost Extended credit term price The difference is interest Expense over the credit term. Normal credit term price If the entity is NON-VAT Registered, then VAT is added as cost of the inventory. If the storage cost is substantially essential in the process of creating the product, such as wine, then storage cost is inventoriable or added as cost of inventory. Date of Purchase Date of Requisition Date of Completion Date of Sale Notel Costs from date of Purchase to the date of completion are costs of Inventory. Exsensed However, if costs are necessary to bring the linventory into its present location and condition, then costs from Date of purchase to Date of sale is inventoriable. For example, the inventory is already completed but certain costs of designing before sale is added because of specific customer. under tine category of Transportation" or "Freight", Freight-in is a cost that is added to the cost of purchase by the buyer, provided that the term of shipping is "FOB Shitting zoint". On the other hand, if the term of shipping is FOB Destination" then the seller recognizes the cost of freight as selling expense that is also known as Freight-out. Note that selling expenses are not included as part of inventory's cost. IMPORTANT FORMULAS Raw materials inventory, beginning Aldi Net purchases Add Direct Labor Add Finisred Grods, beginning Purchases Allik Applied Factory Overhead Cost of Goods Available for sale Total Manufacturing Cost Less: Finished Goods, ensing Grass Purchase Cost of Goods Sold Less: Partiase Return and allewenzes X Tetal Manufacturing Cest Lesa: Puronase Discounts Add Work-in-Process, beginning Raw Materials available for use Total Cost of groves sut in process Lesti Raw mitteris inventory, end Less: Wert-Process, ent Raw Materials used Cost of Goods Manufactured The Formulas above can be expressed in T-accounts presented below. DIRECT MATERIALS WORK-IN-PROCESS Beginning balonce Ending balance Beginning balance Ending balance Purchases Freight-in Direct Materiais used Divest Materials used Cast of Goods Manufactured Purchase Return and allowances Divest Labor Purtierse Disarunt Applied Factory Overhead FINISHED GOODS Beginning balance Ending balance Cest of Goods Manufactured Cest of Goods Sold CONSIGNMENT OF GOODS is the principal owner of the Inventories that are sent to a consignee to be sold to third party. Consignor Cost of Freight cost of transportation to deliver the goods to the consignor is capitalized as cost of inventory. The consignor usually calls it as "held on consignment". Acts as a sort of middleman or agent which is the individual that retains the inventories and passes them along to a third party. Consignee Cost of Freight Cost of transportation to deliver the goods to the customer of third- party is expensed Suppose the Consignor sold inventories directly to the customer, the Cost of Transportation or Freight is an outright expense Customer