Chapter-3 INVENTORIES(JAS-2) 45)

INTERNATIONAL ACCOUNTING STANDARD - 2

{INVENTORIES}
. Definitions
Measurement of inventories
2.1 Cost of inventories

2.1.1 Cost of
purchase
2.1.2 Cost of conversion
2.1.2.1 Fixed and variable
production overheads
2.1.2.2 AIlocation of fixed and variable cost of
production
2.1.3 Other costs

2.1.4 Cost of inventories of a service

provider
2.2 Techniques for measurement of costs
2.2.1 Standard costs

2.2.2 Retail method

2.3 Cost formula

3. Net realizable value

4. Recognition as expense

5. Disclosure

KEY POINTS

PRACTICE QUESTIONS
ASSIGNMENT MATERIAL
 Chapter-3
INTERNATIONAL FINANCIAl, REPORTING.
(46) AN INSIGHT INTO
INVENTORIES (1AS-2)

Definitions
used in this standard
with the meanings specified
1.1 The following terms are

1.1.1 Inventorics are assets:

(a) Held for sale in the ordinary course of business;

In the process of production for sale;

or
(b)
or
supplies to be consumed in the production process
(c) In the form of materials or

in the rendering of services.

course of business less

is the estimated selling price in the ordinary
1.1.2 Net realizable value to make the sale.
the estimated costs of completion and the cstimated costs necessary

Example-1
Madina (Private) Ltd. has stock of shoes. The cost of the stock of shoes is Rs. 15.000.
The company has also a work in process of that stock. The estimated cost to complete
this work-in-process stock is Rs. 5,000. Uptill now Rs. 10,000 have been spent on this
work in process stock.

The company pays 2% commission on sales to its distributors. The estimated selling
price of finished goods and work in process (when this will be converted to finished
goods) is Rs. 35,000.

Required: Calculate NRV.

Solution-1

Rs.
Sales price
Less: Estimated cost of completion 35.000
Estimated cost necessary to make sales (Rs. 35,000 5,000
x 2%) 700
NRV 6,700)
29,300
1.1.3 Fair value is the amount for whieh an asset could be exchanged, or a
between knowledgeable, willing liability settled.
parties in an arm's length transaction. |Para 6|
1.2Inventories include goods purchased and held for
resale for exannple, merchandise
retailer and held for resale, or land and
a
other property held for resale. purchased by
finished goods produced, or work in Inventories also include
progress being
and supplies
awaiting use in the production process. produced,
|P'ara 81
by the entity and include materials
2, Measurement of inventories
Inventories shall be measurcd at the lower of cost and net
realisable value. [Para 91
Chapter-3 (47)
INVENTORIES (IAS-2)
Exanple-2

0 ncasures its inventories at lower of cost and NRV. The cost of inventories held by Bonus
Ltd. is
RS. 35,000. The estimated selling price of inventories is Rs. 30,000. The company pays KS.
Comsson on sales to manager. You are required to calculate the valuc at which inventories snou
appear in balanee sheet.

Solution-2

Cost Rs. 35,000

Sales price Rs. 30,000

Commission Rs. 30.000 x 5%

Rs. 1,500

NRV Rs. 30,000 - Rs. 1,500

Rs. 28,500

Inventories are measured at lower of cost and NRV so value of inventory is Rs. 28.500 that should appea
in Balance sheet.

2.1 Cost of inventories

The cost of inventories shall comprise all costs of purchase, cost of conversion and other costs
incurred in bringing the inventories to their present location and condition. [Para 10]

2.1.1 Cost of purchase

These comprise:

discount if any;
purchase price, less trade
non-refundable taxes;
import duties and other
and
transport and handling;
finished goods, materials and
other costdirectly attributable to acquisition of
services. [Para 11]

Example-3

material for use in production of goods with following details

raw
Sajid Lid. imported
Rs. '000
1,000
Invoice valuc 150

Custom duty 50
Central excise duty (C.E.D) 225
Non-adjustable income tas 180
Refundable sales tax 40
00
Carriage clearance of raw materials
Commission paid to agent lor
(48) AN INSIGHT INTOINTERNATIONAL FINANCIAL REPORTING... Chapter-3
Required: Calculate the cost of purchase of inventories.

Solution-33
Rs.
1,000
Invoice value 150
Custom duty 50
C.E.D. 225
Non-adjustable income tax 40
Carriage 100
Commission to agent 1,565
Cost of purchase

2.1.2 Cost of conversion

These include:

Direct labour

Fixed and variable production overheads [Para 12]

2.1.2.1 Fixed & variable production overheads

remain
indirect costs of production that
Fixed production overheads are those
volume of production, such as depreciation
relatively constant regardless of the and the cost of factory
and maintenance of factory buildings and equipment,
overheads are those
administration. Variable production
management and volume
or nearly directly, with the
indirect costs of production that vary directly,
and indirect labour. [Para 12]J
of production, such as indirect materials

variable production overhead

2.1.2.2 Allocation of fixed &
to the costs of inventories
(a) The allocation of fixed production overheads
facilities. Normal
is based on the normal capacity of the production
to be achieved on average, over a
capacity is the production expected into
number of periods or seasons under normal circumstance, taking
account the loss of capacity resulting
from planned maintenance;

The actual level of production may be used if it approximates normal

(b)
capacity;
is
The amount of fixed overhead allocated to each unit of inventory
not
(c) increased as a consequence of low production or idle plant;

In periods of abnormally high production, the amount of fixed overhead

(d) allocated to each unit of production is decreased so that inventories are
not measured above cost; and

Variable production overheads are allocated to each unit of production

(c)
the basis of the actual use of the production facilities. |Para 13]
 INVENTORIES(IAS-2) (49)
Example-4
Rs.
Direct material 1,000,000
Direct labour 500,000
Overheads-Variable 500,000
Overhead-Fixed 250,000

Normal production per annum 1,500,000 units

During 2004 the actual production of Sibtain Company was 1,200,000 units.

Required: Calculate cost of ending inventory of 200,000 units.

Solution-4
Rs.
Material 1,000.000x
L1,200,000
200,000 166,667

Labour00,000
x 200,000 83,333
1.200,000
Variable overheadsUU,000x 200,000 83,333
L1,200,000
Fixed Overheads
250,000
X 200,000 33,333
L1,500,000
Cost of closing stock 366.666
2.1.3 Other costs

2.1.3.1 Other costs are included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition. For
example, it may be appropriate to include non-production overheads or the cost
of designing products for specific customers in the cost of inventories. .Para 15]

Example-5
Saphire Sports Ltd. purchased cloth for making track suits. During the month the
company has purchased cloth worth Rs. 200,000. General Manager spent his
10% time on the purchases related work. The salary of the manager is Rs.
80,000.
At the month end no cloth has becn uscd. You are required to calculate the value
of inventory of cloth held by the company.

Solution-5
Rs.
Purchase price 200,000
Add: Directly chargeable expenses
General Manger salary (80,000 x 10%) 8,000
ANINSIGHT INTOINTERNATIONAL FINANCIALL REPORTING.. Chapter-3
Value of inventory 208,000

I Example of excluded from the cost of inventories and

costs recognized as

eNpenses in the period in which they are incurred are:

abnormal amounts of wasted materials, labour or other production costs;
(a)

(b) storage costs, unless those costs are necessary in the production process
betore a further production stage;

administrative overheads that do not contribute to bringing inventories to

their present location and condition, and

(d) selling costs. [Para 16

2.1.3.3 1AS 23 Borrowing costs" identifies limited circumstances when borrowing

costs are included in the cost of inventories. [Para 17]

Example-6
RT Limited purchases rice and exports it when they are old. RT limited got an
order to export 100 tons of old rice after 7 months. The company during the
current month, purchased rice worth Rs. 2,000,000. The following expenses in
relation to rice incurred during the month by the company.
Rs.
Carriage 110,000
Storage cost 17,000
Administration expenses 13,000

Required: Calculate the value of Inventory

Solution-6
Rs.
Invoice price 2,000,000
Carriage 10,000
Storage cost 17.000
Value of inventory 2,127,000
Example-7
Interactive (Private) Limited held inventories at the month end, the following
data relates to inventories:

Rs.
Purchase price 50,000
Freight 2,000
Storage cost for the month I.000
Administration cost for the month 5,000
Selling cost for thhe moth 3,000

Required: Calculate the value of Inventory.

 INVENTORIES(IAS-2) (51)
Solution-7

Rs.
Purchase price 50,000
Freight 2,000
Value of inventory
52,000
3 An entity may purchase inventories on deferred settlement terms. When the
arrangement cffectively contains financing elements, that element, for example a
difterence between the
purchase price for normal credit terms and the amount
paid is recognized as interest
expense over the period of the financing. [Para 18)

Example-8
Buraq Ltd. purchased raw material on the following terms:
Rs.
Down payment on 1stJuly 10,000
1st installment on 10th July 20,000
2nd Installment on 20h July 20,500
3rd Installment on 30th July 21,000
At the end of July, company has not yet started use of material. The price on
which company may have purchased the material on cash is Rs. 65,000.

Required: Record thhe transaction.

Solution-8

The amounts to be recognized are as follows:

Value of Inventory = Rs. 65,000

Charge to profit & loss = {10,000+20,000+20,500+21,000-65,000}

(ii)
= Rs. 6,5000

2.1.4 Cost of Inventories of a service provider

(a) These costs consist of primarily the labour and other costs of personnel directly
engaged in providing the service, including supervisory personnel, and
atributable overheads.

Labour and other costs relating to sales and general administrative personnel are
(b) not included in cost of inventories, instead, these are recognized as expenses in
the period in which they are incurred.

The cost of inventories of' a service provider does not include profit margins
or
(c) to
non-attributable overheads, which are often considered by service providers
charge prices to clients. |Para 19|
2) ANINSIGHTINToINTERNATIONAL FINANCIAL REPORTING.... Chapter-3
Exanple-9
Ahmad Chartered Accountants was appointed by M.F. Elahi and company as its auditors
Ahmad Chartered Accountants sent four juniors and one senior to the job on 20 July.
On 31 July 2007, the work is still in progress. The expenses ofthe CA firm incurred on
13 audits for the month of July are as follows:-

Rs.
Stipend to juniors 80,000
Stipend to semi-seniors 35,000
Stipend to seniors 60,000
Traveling allowance 15,000
Audit fee of 12 audits 800,000

The following proportionate expenses relate to job of M.F.Elahi

Rs.
Stipend to juniors 5,000
Stipend to senior 4,000
Travelling allowance 1,000
Required: Calculate the amount of work done on the job of M.F.Elahi

Solution-9

Rs.
Stipend to student
5,000
Conveyance 1,000
Stipend to senior
Value of work done/ 4.000
inventory 10,000
Statement of Comprehensive Income
For the month ended 31
July, 2007

Revenues (12 Audits) Rs.

Less: Cost of services rendered: 800,000
Stipend-J (Exp. of l13 audits) 80,000
Stipend- SS (Exp. of 13 audits) 35,000
Stipend S (Exp. of 13 audits) 60,000
Traveling (Exp. of 13 audits)
15.000
Less: Work done but 190,000
not billed 10,000
Gross profit (12 Audits) 180,000
620,000
Note: It is not
probable now that economic benefits will flow
is not
complete. Instead, it will be probable in future. to the enterprise as audit
2.2
Technique for the measurement of cost
Techniques for the measurement
of the cost of
the retail method, may be used for inventories, such as the standard cost method
convenience if the results
or
approximate actual cost. [Para 21
2.2.1 Standard costs
and supplies, labour,
Standard costs take into account normal levels of materials revised
are regularly
reviewed and, if necessary,
etticiency and capacity utilization. They
in the light ofcurrent conditions. |Para 21|

Example-10
surgical item. The
M.A. Arain Limited is engaged in the production of speculum, a

company has set the following standard costs:

3,000 per unit
Material
1,200 per unit
Labour 800 per unit
Overheads
units. You are required to calculate the
At the end of the year, the company owns 500
value of inventory by standard cost method.

Solution-10
Rs.
Material cost (3,000 x 500) 1,500,000
Labour cost (1,200 x 500) 600,000
Overheads (800 x500) 400.000
2,500,000
Value of Inventory

2.2.2 Retail method

inventories of
The retail method is often used
in the retail industry for measuring
(a) items with similar margins for
which it is
large numbers of rapidly changing methods. The cost of the inventory is
impracticable to use other costing
value of the inventory by the appropriate
determined by reducing the sales
percentage of gross margin.
been marked
into consideration inventory that has
(b) The percentage used takes retail
An average percentage for each
down to below its original selling price.
department is often used. [Para 22]

Example-11
30 % profit. At the end of the year,
store
Al-Fateh Departmental
store sells goods on
calculate
which is Rs. 10,000,000. You are required to
owns goods the selling price of
the value of inventory

Solution-11

Value of inventory [1o,000,00070

100 Rs. 7,000,000
 AN INSIGHT INTOINTERNATIONAL FINANCIAL REPORTING. Chapter-3
Example-12
HKB sells goods at 35% profit margin. During the current month, the retailer oftered
10% discount on all of the goods.

At the end of the month, the retailer own goods at a new selling price (i.e. discounted
price) of Rs. 9.000,000.

You are required to calculate the value of inventory.

Solution-12

Value of inventory 10,000,000 x65 Rs. 6,500,000

100

{Working notes)

(W-1)

9,000,000
Original selling price 100
90

Rs. 10,000,000

2.3 Cost formulas

2.3.1

Type of inventory Basis

a) Specific inventories

1. Not ordinarily interchangeable items Individual costs

2. Goods or services produced and segregated

For specific projects Individual costs

b) Other inventories FIFO or

Weighted average
[Para 23 & 25]

2.3.2 (a) The FIFO formula assumes that the items of inventory that were purchased or
produced first are sold first, and consequently the items remaining in the
inventory at the end of the period are those most recently purchased or produced.

(6) Under the weighted average cost formula, the cost of cach item is determined
from the weighted average of the cost of similar items at the beginning ofa
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 entity.[Para 27|
 (55)
INVENTORIES(IAS-2)
Example-13
different items that are
the production of
Manufacturing Company is engaged in
Delta the following
interchangeable. During the month, the company produced
ordinarily
units:
2,000 units
Product A
3,000 units
Product B

The sales for the month are:

1,800 units
Product A
2,700 units
Product B

Cost of producing the each unit of:

Rs. 300
Product A
Rs. 200
Product B

Required: Calculate the value of inventory.

Solution-13
Rs.
Product A (200 x 300) 60,000
Product B (300x200) 60.000
Value of Inventory 120,000

Example-14
carries valuation of supplies at the end
of each month. For the
Indus Oil & Expellers Ltd. of the company.
information is available from the records
month of February following
130.000 liters
Stock on February 28, 1998
150,000 litersRs. 10.65
Purchase- 10 February, 1998
100,000 litersRs. 10.50
Purchase- 17 February, 1998
100,000litersRs. 10.60
Purchase- 28 February, 1998

345,000 liters
Sales during the month
125,000 lites R s . 9.75
Stock on January 31, 1998

using FIFO.
Calculate value of inventory
Required:

Solution-14

Rs.
1.060,000
100,000 litres Rs. 10.60
30,000 litersRs. 10.50 315,000
Value of inventory 1,375,000
(56) ANINSIGHT INTO INTERNATIONAL FINANCIAL REPORTING. Chapter-3
Evample 1s

Shah Petroleum Services cngaged in supply of petroleum products. For the month of
September following information available:
Stock on 31 August, 2005 25,000 liters@Rs. 37.01

Purchase-05 September, 2005 100,000 litersRs. 37.35

Purchase-15 September, 2005 100,000 litersRs. 37.15
Purchase-25 September, 2005 100,000 liters@ Rs. 37.05

Stock on 30 September 30,000 liters

Required: Calculate the value of inventory using monthly weighted average method.

Solution-15

Date Units (Liters) Rate (Rs.) Price (Rs.)

Sep 01 25,000 37.01 925,250
Sep 05 100,000 37.35
Sep 15
3,735,000
100,000 37.15 3,715,000
Sep 25 100.000 37.05 3,705.000
325,000 12,080,250

Weighted average rate 12,080,250

325,000

Rs. 37.17
Cost of inventory
30,000 x 37.17
Rs. 1,115,100
Example-16
Accurate Limited is engaged in the production of sports goods. Raw material is
by the company is
shipments. The unit price is measured after the arrival acquired
shipment to charge to
production on the basis of of each
available for the month of weighted average. Following data is
January:
Stock on January 1
30,000 Units@Rs. 10.50
Purchases 10 January
-

Purchases -20 January 60,000 UnitsRs. 11.00

Sales 25 January 40,000 UnitsRs. 13.00
110,000 Units
Stock on January 31
20,000 Units
Required: Calculate value of
inventory and cost of goods sold.
Solution-16
hapter -3 (57)
INVENTORIES(IAS-2)
Weighted Average per unit 30,000 x10.5+60,000x11.0+40,000 x13.0
30,000+60,000+40,000

Rs. 11.5

Value of stock on January 31 20,000 x 11.5

Rs. 230,000

Cost of sales for January Opening stock + Purchases- Closing stock

110,000 x 11.5
Rs. 1,265,000
Net realizable value
3.1 Net realizable value is the
estimated selling price in the ordinary course of business less the
estimated costs of
completion and the estimated costs necessary to make the sale. [Para 28]
3.2 Inventories are usually written down to net realizable value on an item by item basis. In some
Circumstances, however, it may be appropriate to group similar or related items e.g. items of
inventory relating to same product line that have similar purposes or end uses and cannot be
practically evaluated separately from other items in that product line. [Para 29
Example-17
Steadtler Limited owns the following products with details
Items Units Cost per unit (Rs.) NRV per unit (Rs.)
Josh 400 5,000 6,000
Jazba 400 4,500 4,000
Easy 200 400 410
Max 300 600 500

Calculate the value of inventory on items by item basis:

Solution-17
Items Units Cost per unit NRV per unit Valuation Lower of
(Rs.) (Rs.) Cost & NRV
Rs. (Total)
Josh 400 5,000 6,000 (400 x 5,000) 2,000,000
Jazba 400 4,500 4,000 (400 x 4,000) 1,600,000
Easy 200 400 410 (200 x 400) 80,000
Max 300 600 500 (300 x 500) 150,000
Value of Inventory
3,830,000
Example-18

Bata Pakistan Limited is engaged in the manufacturing of shoes. The following is the details of
units held by one of its retail outlet

Items Units Cost per unit (Rs.) NRV per unit (Rs.)
P 450 900 100
200
80
F 160 400 410
LI20 300 600 500
 Chapte-3
Chapte-S
REPORTING...
I N T E R N A T I O N A L
FINANCIAL 400
INTO
AN INSIGHT 300
100
Q200 on aggregate
basis.

in the books
to be recognized
Calculate the value of inventory

Total NRV
Solution-18 NRV per unit
Total Cost Rs.
Cost per unit Rs.
Items # Units Rs. 72,000
Rs. 80
90,000 82,000
100 410
P450
900 80,000 150,000
400 500
F160 200
600
180,000
400
40,000
L120 300 30,000 344,000
300
Q200
100 380,000
measured at NR
V which
should be
lower so value of inventory
is
As NRV of the entire inventory
is Rs. 344.000

Example-199 the company

fountain pens.
At the year end,
of
the production
Stream Limited
is engaged in

owns the following inventory. NRV per unit (Rs.)

Cost per unit (Rs.) 80
Items # Units 100
300 6000
K 300i 5000 4000
200 4500
K 500i 400
100
K 700i 300 410
J200i
400 400
400 500
C 100 600 55
900 50
C110 95
1000 100
C 200 40
50 50
N 500
N 600
200
aggregate by category
amount of inventory by
to calculate
the
You are required
Required:
basis.

Solution-19 Lower of
Total Total
NRV cost & NRV
Items # Units Cost cost NRV
per unit
per unit Rs.
Rs Rs.
Rs.
Rs. 30,000 24,000
80
100 1,200,000
K 300 300 6,000 1,000,000
200 5,000 400.000
K500i 4,000 450,000 1.480,000
100 4,500 1,624,000
K700i 1,480,000

120,000
120,000 60,000
300 400
200 400
160,000 164,000
400 410
400 540,000 450,000
C100 500
900 600 $5,000
C110 55 50,000
1.000 50 669,000 669,000
C200 750,000
Chapter-3
INVENTORIES(1AS-2) (59)
N500 50 100 95 5,000 4,750
N600 200 50 8,000
40 10,000
I5,000 12,750 12,750
Value of Inventory 2,281,750
3.3 Materials and other supplies held for use in the production of inventories are not written down
Delow cost if the finished goodsin which they will be incorporated are expected to be sold at or
above cost. |Para
32|1
Example-20
COtton Expert Ltd. is engaged in the manufacturing of cloth. The price of cotton acquired by
Oton ENperts has fallen from Rs. 200 per unit to Rs. 180 per unit. At the month of end

Company has 3,000 units which it had purchased Rs. 200 per unit. The cloth made from this
cotton is Sold @Rs. 500 per unit. The cost of producing one meter cloth is Rs. 400. One unit of
cotton is converted into one meter cloth
Required: Calculate the value of inventory of Raw material.
Solution-20
As the finished
goods are sold above their cost, so inventory of such raw material is not written
down to N.R.V.

So, value of inventory 200 x 3,000

Rs. 600,000
 Chapteer
INTERNATIONAL FINANCIAL REPORTING...
60) AN INSIGHT INTO

Example-2 is converted in to one

the manufacturing. One
unit of raw material On
Prince Limited is cngaged in is Rs. 400 per unit.
material acquired by the company
goods. The cost of raw
unit of finished Rs.400 to Rs.300. The
cost of producing
price have fallen from
January 31, due to e x c e s s supply unit.
the product is Rs. 500 per
one unit of finished goodsis Rs. 600 while NRV of
material at
has 75 units of
raw

Calculate the value of inventory

of Raw Material. The company

month end.

Solution-21
as the
written down to NRV/
replacement cost,
The value of inventory of Raw material will be
above cost. Thus
finished goods are not sold at or

75 units@ 300 per unit

Value of inventory of raw material
Rs. 22,500

Recognition as an expense
4.
of those inventories shall be recognized
as an
amount
(a) When inventories are sold, carrying
expense in the period in which the related revenue is recognized.

inventories to net realizable value and all losses

of inventories
(b) The amount of any write-down of
the write-down or loss occurs.
shall be recognized as an expense in the period,

write-down of inventories, arising from an increase in

net
(c) The amount of any reversal of any
amount of inventories recognized as an
realizable value shall be recognized as a reduction in the
expense in the period in which the reversal occurs. [Para 34]

Example-22
SOS Limited is in the production of surgical item. The following data is available for the month
engaged
of August.

Opening stock 3,000 unit Rs. 100 per unit

Production 30,000 unit Rs. 100 perunit

Closing stock 2,000 unit Rs. 100 per unit

Required: Calculate the expenses to be charged to income stalement.

Solution-22

Expense charged to Income Statement.

Rs.
Chapter-3

Opening Stock INVENTORIES

(IAS-2) (61)
Add: Production
300,000
Less: Closing Stock 3,000.000
Cost of 3,300,000
goods sold 200,000
3,100,000
OR
Unit sold
Opening units + Units produced -Closing units
3,000+30,000-2,000
31,000 units
Cost of
goods sold 31,000 x 100
Rs. 3,100,000
Erample-23
Khas Traders has the
following data for the month of March:
Opening stock
300 units@Rs. 100
Purchases
1,000 units@Rs. 100
Closing stock
200 units
At 31 March. the
NRV of the
that should be product comes down to Rs. 95. You
recognized. are required to calculate the expense
Solution-23

Opening stock Closing stock at NRV (Rs.)

Purchases 30,000
100,000
Closing stock 130,000
Cost of goods sold (19.000)
I.000
Example-24
Khas Traders has the following data for the month of April (considering example 28):
Opening stock 200 units@ Rs. 95
Purchases 2000 units Rs. 100
Closing stock 200 units
Due to market fluctuation, NRV of the product goes to Rs.120 per unit.
Required: You are required to calculate the expenses that should be charged to Income Statement.

Solution-24
 REPORTING... Chapter-3
64) AN INSIGHT INTO INTERNATIONAL FINANCIAL in which reversal
Amount of any reversal arising from increase in NRV shall be recognized
in period
occurred.
would be, had
After reversal, the amount recognized as inventories shall not increase from the cost that
there been no reduction to NRV.

PRACTICE QUESTIONS
this is applied as a
estion *l1: The financial accounting records are used to determine the overhead cost, and
percentage based on the direct labour cost. For direct labour cost, you
have agreed that the labour
expended for a unit in work in progress is half that of a completed unit.
The draft accounts show the following materials and direct labor cost in inventory.

Raw material WIP Finished goods

Material 786,740 92,685 125,963
Direct labour 13,082 46,594

The cost incurred in April, as recorded in the financial accounting records were as follows:

Rs.
Direct labour 68,012
Selling cost 55,430
Depreciation 9,440
Distribution cost 7,560
Factory mangers cost 2,560
Other production overheads 34,920
Purchasing and accounting cost relating to production 4,550
Other accounting cost 7,260
Administration overheads 42,760
For calculations assume that all work-in-process and finished goods
and that the company
were produced in April 2006
was operating at a normal level of activity.

Required: Calculate the value of overheads which should be added to

finished goods in accordance with lAS-2. work-in-process and

Question #2: The material is imported by the ABC Co. from America and there
the
incurred on manufacturing of goods:
are
following expenses

Purchase price of materials used Rs. 000

Volume rebate 2,500
Custom duty 380
Sale tax (Refundable) 500
Material handling charges 870
Discount allowed 250
Store rent S50
Indirect labour 630
Variable overheads 740
Depreciation 230
Material wasted 120
600
Chapter-3 (65)
INVENTORIES (IAS-2)
Commission 880
to agent for selling the products
Required: Calculate the value of inventory.
Question # 3: The following information is available from ABC Company, 2006 accounting records

Rs.
Purchases 530,000
Purchase discounts 10,000
Beginning inventory 160,000
Ending inventory 215,000
Freight out 40,000

Required: Calculate cost of goods sold.

Question # 4 Imran Ltd. manufactures executive toys. It intends to improve its image by repackaging its
exIsting stock in new covers, and to offer discounts to retailers for prompt payment. The
financial details of 'Gold Cube', one of the items to be repackaged, are as follows:

Per item (Rs.)

Cost of manufacture 25.00
Repacking cost to be incurred 7.50
Selling price 30.00
Prompt payment account 10%

Required: At what amount should each item of stock be valued in the accounts?

Question # 5: Vanilla Ltd. normally makes a gross profit of 22%. However, in the year ended December 31,
2005 some old stock which had cost of Rs. 1,000 was sold for Rs. 800. Purchases in the year
were Rs. 15,000, and opening and closing stocks were Rs. 4,000 and Rs. 5,500 respectively.

Required: What were sales for the year?

Question # 6: The value of stock as on July 10, 2004 is Rs. 30,000. Books sold and purchased from July 01, to
July 10, amounts to Rs. 15,000 and Rs. 8,000, Gross profit rate is 25% on cost.

Required: Value of stock as on June 30, 2004

Question # 7: Given below is the information extracted from records of XYZ Company.

Opening stock Rs. 10,000

Sales Rs. 80,000
Purchases Rs. 70,000
Gross profit rate 25% on sales

Required: Calculate the closing stock.

Question # 8: Work out the value of inventory from the following data:

Inventory quantities:

Raw matcrial 100,000 Kg

WIP 10,000 meters
 (66) AN INSIGHT INTOINTERNATIONAL FINANCIAL REPORTING... Chapter-3
Finished goods 1,000,000 meters

Per unit cost:

Raw material Rs. 100

Rs. 500
Finished goods

Net realizable value:

Raw material - Replacement cost Rs. 90

Rs. 85
-
Estimated selling price
Finished goods - Sales made in the subsequent period is as follows:

400,000 units Rs. 505 per unit

300,000 units Rs. 510 per unit
300,000 units Rs. 515 per unit

Other Information:

1. No selling expenses are incurred for making sales.

WIP was 70% complete and cost is incurred evenly throughout the production process.
2
Question #9: Work out the total cost incurred for production and per unit cost of inventory from the following
information:
Production during the year 500,000 Meter

Rs.
Raw material purchased 500,000
Labour cost incurred 200,000
Supervisor's salary 250,000
Production manager salary 300,000
Social Security charges of production workers 20,000
Cost of annual shutdown of plant 100,000
Lubricant for plant 10,000
Packing material being a production cost 25,000
Accountant salary 105,000
Commercial manager salary 225,000
Godown rent 120,000
Power charges 300,000

Production of last 5 years is as follows:

1996 1997 1998 1999 2000

550,000 475,000 525,000 515,000 500,000
The maximum capacity of plant under ideal conditions is 600,000 meter.

Question # 10: AL-Falah Ltd. is a manufacturing concern which produces and sells a product ALPHA. Purchase
of raw material is made in pre-determined quantities of 1000 tons at the start of each weck.
Information relating to purchases of raw material is as follows:
Chapter-3
INVENTORIES (IAS-2)_ (67)

Quarter1| Quarter 2Quarter 3 |Quarter 4

Purchase price (Per ton) 100 120 140 150
Customs duty (Per ton) 15 15 15 15
General sales Tax (% of Purchase 15% 15%
Freight inward (Per ton) price) 15% 5%
20 30 25 35
Ouuctuon during the year was 50,000 tones and there was a normal capacity to produce 60,000
tones.
Details of other costs incurred are as follows:

Rs.
Labour costs 1,000,000
Packing Material (Production Cost) 800,000
Production Supervisor's salary 100,000
Godown rent 260,000
Power charges 580,000
Other fixed overheads 300,000
Salary of sales workforce 400,000
Delivery cost 40/ ton

Each unit of finished goods of the product is sold at Rs. 300. There was no opening stock and at
the year-end there were 5,000 units of raw material and 2000 units of finished goods in
inventory.
Required: Find out the value of finished goods inventory on weighted average basis.
 Chapter-3
INTERNATIONAIL
FINANCIAL REPORTING.
(68) ANINSIGHT INTO
ASSIGNMENT MATERIAL
of
are received
in the packing
The bullets
bullets from USA. is as follows:
UBL Ltd. imported a consignment of of 100,000 boxes
A.M * I: the consignment
incurred UBL Ltd. for
by
one hundred. The cost
Rs.
100,000,000

Amount paid to GWB Ltd. (supplier) 2,000,000

Import license fee 30,000,000

15,000,000
Customs duty
Sales tax (Not adjustable) 4,200,000

Income Tax 200,000

bills
Clearing and forwarding agents

of each box.
Work out the total cost of consignment and cost

pipes which are

used for supply of water
material and manufactures
Iron & Steel Mills Ltd. buys
raw
the year.
A.M #2:
have incurred the following costs during
and gas to c o n s u m e r s . They
Rs. in million
100
Raw material 40
Direct labour 30
Electricity & gas 10
Rent
Indirect material
Indirect labour (fixed) 10
building
Depreciation of plant and factory
Administrative expenses

Selling and distribution charges

Financial charges
of 10 feet whereas
1,000,000 pipes of 2" dia having length
a

During the year the company produced of labour

is 1,200,000 pipes which could not be achieved because
their normal level of production
unrest and low demand in
market generally.

Required:
Total manufacturing cost and cost per pipe.
)
and related Cost of Goods Sold. Also
ii) Calculate cost of ending inventory of 200,000 pipes
calculate per unit cost for both.

From the following data work out total cost of inventories acquired during the month.
A.M # 3:
Amount (Rs.)
Date Detail
07-7-00 Amount paid to supplier 70,000,0000
07-7-00 Transportation charges on purchase 50,000
25-7-00 Amount paid to supplier 80,000,0000
25-7-00 Carriage outward 70,000
25-7-00 Electricity charges of office 10,000
25-7-00 Telephone charges (office) 5,000
27-7-00 Godown rent paid 25,000
Chapter-3

30-7-00 INVENTORIES (1AS-2) (69)

30-7-00 Accountant's salary 17,000
Insurance charges of
30-7-00 Mark up on loan for
goods in godown 13,000
31-7-00 acquisition of inventories
Salary of godown keeper 15,000
4,000
NOLC ccountant is also a
member of purchase committee and 10% of time
goods and their is spent on ordergfor
inspection at the time of purchase.
A.M #4: Work the
out value of
Net realizable value ending inventories from the following data
on: by writing down various items to

i) Item to item basis, and

ii) On aggregate basis.

ii) aggregate by category basis.

Item # Units Cost per unit (Rs.) NRV per unit (Rs.)
K100 70 50 55
KI10 200 100 95
K120 50 1000 1050
K130 1000 50 40
L500 900 100 80
P700 400 5000 6000
P710 400 4500 4000
Q900 100 300 400
Q950 200 400 410
Q960 300 600 500
A.M # 5: Mazhar Sons deal in second hand
computers which they import from Australia and after necessary
repair and servicing sell in rural areas of Punjab. The repair costs incurred by them also include
replacement of various parts. Due to low capital investment in the business, they import each lot only
when the previous lot is expected to be
disposed of by the time new lot reaches Pakistan. In their line
of business 5% is considered as normal loss. On 25h June
2001, they received a lot of 500 computers
and incurred the following costs:

Rs.
LC charges paid to bank
5,000,000
Surcharge 250,000
Clearing and forwarding charges
100,000
On 30 June 2001, this was the only inventory they held.

Subsequent to 30th June, they incurred servicing charges amounting to Rs. 300 per PC and a total cost
of Rs. 480,000 on repairs and replacement of parts. The sale of these PCs cannot be made unless MS
Office is installed. They incurred a total cost of Rs. 96,000 as installation charges. 20 PCs out of the
lot were found totally damaged and were discarded before servicing. Each good PC is expected to be
disposed of at an average selling price of Rs. 15,000.

Required: Value of inventory as on 30th June 2001.