Inventories: Lecturers Containing The Suggested Solutions For Questions Without Answers

IAS 2
Inventories
__________________________________________________________________
 QUESTIONS AND SOLUTIONS
IAS 2.1 Measurement of inventories – cost of conversion

IAS 2.2 Measurement of inventories – net realisable value
IAS 2.3 Cost formulas
IAS 2.4 Measurement of inventories – allocation of production overheads
IAS 2.5 Disclosure
IAS 2.6 Use of different valuation methods for inventories
IAS 2.7 Joint products and by-products
IAS 2.8 Inventory valuation and disclosure
IAS 2.9 Cash discount and settlement discount
 QUESTIONS
IAS 2.10 Net realisable value of finished goods and raw materials
IAS 2.11 Inventory valuation and calculation of net realisable value of raw materials
IAS 2.12 Inventory valuation and profit calculation
IAS 2.13 Inventory valuation and disclosure
IAS 2.14* Allocation of production overheads and disclosure
IAS 2.15* Inventory valuation, net realisable value and disclosure
* These questions are not in the textbook, but are available in the electronic guide for
lecturers containing the suggested solutions for questions without answers.
Copyright © 2018. Juta & Company, Limited. All rights reserved.
32
Opperman, H.R.B.. Accounting Standards: a Comprehensive Question Book on International Financial Reporting Standards, Juta &
Company, Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ujlink-ebooks/detail.action?docID=6483155.
Created from ujlink-ebooks on 2022-06-07 23:10:02.
Inventories
 QUESTION IAS 2.1
Bata Ltd manufactures takkies. The normal production capacity of the plant is 500 000 pairs
of takkies per annum. Due to an increase in local demand, abnormally high production
volumes were reached during the financial year ended 31 December 20.2 with the
manufacture of 550 000 pairs of takkies.
There were 20 000 pairs of takkies on hand at 1 January 20.2, and 540 000 pairs of takkies
were sold during the year. No raw material inventory is maintained as purchases are
matched to production demand.
The following information is available for the year ended 31 December 20.2:
Rand
Opening inventory (pairs of takkies in rand value) 160 000

Raw material purchased 1 375 000
Auditors’ remuneration 120 000
Directors’ remuneration 125 000
Telephone 70 000
Advertising 220 000
Depreciation
Plant 143 000
Equipment (20% factory; 80% administration) 42 000
Delivery vehicles 112 000
Furniture (20% factory; 80% administration) 31 000
Electricity and water – plant 50 000
Repairs and maintenance
Plant (60% fixed) 150 000
Delivery vehicles 25 000
Cost of factory management 120 000
Consumable inventory used in production process 165 000
Wages 2 420 000
Salaries 300 000
Pension fund contributions 55 000
Medical aid fund contributions 35 000
Unemployment insurance fund contributions (UIF) 30 000
It is estimated that 60% of salaries and related contributions to pension fund, medical aid
fund and UIF, are attributable to the management of the manufacturing activities. Wages
represent direct labour costs incurred in the production of takkies.
There was no work in progress at the beginning or the end of the year.
The estimated net realisable value exceeds the cost of the unsold inventory.
Required
Calculate the value of the closing inventory of Bata Ltd as at 31 December 20.2 in
compliance with the requirements of International Financial Reporting Standards (IFRS).
33
Inventories
 Suggested solution IAS 2.1
Closing inventory Pairs of

takkies
Opening inventory 20 000

Manufactured 550 000
Sold (540 000)
30 000
Allocation of fixed production overheads Rand
Total fixed production overheads 619 600

Depreciation – plant 143 000
Depreciation – equipment (1) 8 400
Depreciation – furniture (2) 6 200
Repairs and maintenance – plant (3) 90 000
Cost of factory management 120 000
Salaries (4) 180 000
Unemployment insurance contributions (5) 18 000
Pension fund contributions (6) 33 000
Medical aid fund contributions (7) 21 000
(1) 42 000 × 20% = 8 400

(2) 31 000 × 20% = 6 200
(3) 150 000 × 60% = 90 000
(4) 300 000 × 60% = 180 000
(5) 30 000 × 60% = 18 000
(6) 55 000 × 60% = 33 000
(7) 35 000 × 60% = 21 000
Allocation of variable production overheads Rand
Total variable production overheads 275 000

Electricity and water 50 000
Repairs and maintenance – plant (1) 60 000

Consumable inventory used in production process 165 000
(1) 150 000 × 40% = 60 000
Unit cost of finished goods Rand
Raw materials (1) 2,50

Labour cost (2) 4,40
Fixed production overheads (3) 1,13
Variable production overheads (4) 0,50
8,53
(1) 1 375 000 / 550 000 = 2,50

(2) 2 420 000 / 550 000 = 4,40
(3) 619 600 / 550 000 = 1,13
(4) 275 000 / 550 000 = 0,50
34
Inventories
According to IAS 2.13, in periods of abnormally high production the amount of fixed
production overheads allocated to each unit of production is reduced so that inventory is not
measured above cost, therefore the allocation of fixed production overheads was based on
actual production of 550 000 pairs of takkies and not on normal capacity of 500 000 pairs.
Inventory valuation Rand
Closing inventory (1) 255 900
(1) 30 000 × 8,53 = 255 900
Rascall Ltd is a diversified entity whose reporting date is 31 December. The following
information, relating to inventory, is available:
Telebunken radios
Units manufactured 10 000

Production cost per unit R500
Selling price per unit R600
Units on hand – 31 December 20.2 6 000
– 31 December 20.3 5 700
On 31 December 20.3 the Minister of Finance announced the scrapping of import duties on
imported radios. According to the marketing director, this announcement will enable the
company to import a similar product at R380 per unit which could be sold at an estimated
selling price of R450 per unit.
Product ‘Blush’
Rascall Ltd concluded a contract with Group Six Ltd to deliver 10 000 units of product
Blush at a fixed price of R1 600 per unit. Delivery of the units took place evenly over the
negotiated delivery period. Rascall Ltd manufactured 12 000 units. The production cost per
unit of Blush is R1 000. The units produced in excess of the contract requirements (more
than 10 000) are sold at R800 per unit.
On 31 December 20.3, inventory on hand of Blush was as follows:
Selling price
per unit
Units Rand
Units contracted for 6 800 1 600

Units not contracted for 1 400 800
35
Inventories
Product ‘Jax’
On 31 December 20.2, 2 000 units of Jax were on hand. The cost per unit of Jax is R3 000
and the selling price is R5 000. On 31 December 20.2 the marketing director informed the
board of directors that a competitor would introduce a similar product to the market on
1 January 20.3 at a selling price of R2 000 per unit. The board decided to reduce the selling
price of Jax to R2 000 per unit as from 1 January 20.3 in order to be able to compete in the
marketplace.
On 31 December 20.3 the competitor was liquidated and Rascall Ltd increased the selling
price of Jax to R5 000 per unit. On 31 December 20.3, 1 200 units of Jax were on hand.
Raw material ‘Dol’
Raw material Dol is used in the production of Kosp. Dol was originally purchased at R120
per unit but purchases of raw material are now made from a new foreign supplier, which
resulted in a reduction of the unit cost to R30. On 31 December 20.3, 20 000 units of Dol
were on hand (purchased at a unit cost of R120). The cost of production of a unit Kosp is
R1 000. The drop in cost price per unit of Dol (due to the new supplier) resulted in the
selling price of Kosp being reduced to R940 per unit. Three units of Dol are used to produce
one unit of Kosp.
Required
a. Calculate the value of inventory of Rascall Ltd at 31 December 20.3.

b. Calculate the amount written off or written back (in profit or loss) in terms of
inventory during the year ended 31 December 20.3 in accordance with the
requirements of International Financial Reporting Standards (IFRS).
Rascall Ltd
a. Inventory valuation Rand
Telebunken radios (1) 2 565 000

Product Blush (2) 7 920 000

Product Jax (3) 3 600 000
Raw material Dol (4) 2 000 000
16 085 000
(1) 450 × 5 700 = 2 565 000

(2) (6 800 × 1 000) + (1 400 × 800) = 7 920 000
(3) 1 200 × 3 000 = 3 600 000
(4) 20 000 × ([940 – {1 000 – (120 × 3)}] / 3) = 2 000 000
b. Amounts written off Rand
Telebunken radios (1) 285 000

Product Blush (2) 280 000
Raw material Dol (3) 400 000
965 000
36
Inventories
(1) 5 700 × (500 – 450) = 285 000

(2) 1 400 × (1 000 – 800) = 280 000
(3) 20 000 × (120 – 100) = 400 000; the write-off on raw material Dol is limited to
the loss made on the finished product Kosp, since each finished product is
manufactured using three units of raw material.
Amounts written back Rand
Product Jax (1) 1 200 000
(1) 1 200 × [3 000 – 2 000] = 1 200 000
Unique Ltd entered into the following inventory transactions during April 20.6:
April
1 Inventory on hand: 20 units – 14 at R180 each

– 6 at R200 each
5 Purchased 60 units at R300 each
11 Sold 30 units
19 Sold 50 units
30 Sold 60 units
The selling price during April amounted to R600 per unit.
Unique Ltd uses a perpetual inventory system. On 30 April 20.6 it was determined that the
normal selling price of the units had dropped to R500 per unit because a competitor had
entered the market. Normal selling expenses amount to R100 per unit.
Required
a. Calculate the cost of sales in the statement of profit or loss and other comprehensive
income for April and the value of inventory on hand at 30 April 20.6 using each of the
following cost formulas:
i. FIFO (first-in, first-out); and
ii. Weighted average cost method.
b. Disclose the above information in the statement of profit or loss and other
comprehensive income of Unique Ltd for the month ended April 20.6 in compliance
with the requirements of International Financial Reporting Standards (IFRS).
37
Inventories
a. Cost of inventory and inventory on hand
i. FIFO method
Cost of sales (calc 1) Rand
Cost of inventory sold 48 220

11 April 20.6 6 720
19 April 20.6 15 000
30 April 20.6 26 500
Inventory written down to net realisable value (2) 1 500
Cost of inventory 49 720
Closing inventory Rand
Net realisable value (1) 46 000
(1) 115 × (500 – 100) = 46 000

(2) 47 500 (calc 1) – 46 000 = 1 500
ii. Weighted average cost method
Cost of sales (calc 2) Rand
11 April 20.6 9 330

19 April 20.6 18 550
30 April 20.6 23 280
Cost of inventory sold 51 160
Rand
Closing inventory
Cost price (calc 2) 44 560
b. Disclosure
UNIQUE LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE MONTH ENDED
30 APRIL 20.6
FIFO Weighted
average
Rand Rand
Revenue (1) 84 000 84 000

Cost of sales (49 720) (51 160)
Gross profit 34 280 32 840
(1) (30 + 50 + 60) × 6 = 840
38
Inventories
Calculations
1. FIFO cost formula Number of Price p.u. Total

units Rand Rand
1 April Balance 14 180 2 520

Balance 6 200 1 200
5 April Purchases 60 300 18 000
11 April Sales (30) (6 720)
Sales 14 180 2 520
Sales 6 200 1 200
Sales 10 300 3 000
19 April Sales (50) 300 (15 000)
30 April Sales (60) (26 500)
Sales 35 400 14 000
Sales 25 500 12 500
Total 115 47 500
2. Weighted average cost formula Number of Price p.u. Total

units Rand Rand
1 April Balance 14 180 2 520

Balance 6 200 1 200
Balance (1) 115 311 35 720
11 April Sales (30) 311 (9 330)
Balance 85 26 390
Balance (2) 125 371 46 390
19 April Sales (50) 371 (18 550)
Balance 75 27 840
Balance (3) 175 388 67 840
30 April Sales (60) 388 (23 280)
115 44 560
(1) 35 720 / 115 = 311

(2) 46 390 / 125 = 371
(3) 67 840 / 175 = 388
Action Ltd, which was incorporated on 1 January 20.3, manufactures product ‘Power’ for
the building industry. Action Ltd has a reporting date of 31 December.
The following information is provided:

 Normal capacity of plant – 25 000 units
39
Inventories
 Market demand per annum – 18 000 units
 Various fixed costs incurred:
Year 20.5
Rand
Total 136 000
Insurance – factory plant and equipment 6 000
Selling expenses 18 000
Depreciation – factory 80 000
Depreciation – offices 10 000
Auditors’ remuneration 16 000
Insurance – delivery vehicles 6 000
 Fixed production overheads have increased annually at the same rate as variable costs.
 Variable costs included in closing inventory at 31 December are as follows:
Year 20.5 20.4 20.3

Variable costs R87 120 R77 000 R60 000
 The following inventory was on hand at 31 December:
Year 20.5 20.4 20.3

Units 6 600 7 000 6 000
 All sales are on credit.
Required
Calculate the value of inventory of Action Ltd for the reporting dates 31 December 20.3 to
20.5 in accordance with the requirements of International Financial Reporting Standards
(IFRS).

Fixed production overheads – 20.5 Rand
Insurance – factory plant and equipment 6 000

Depreciation – factory 80 000
86 000
Increase in variable costs 20.5 20.4 20.3
Variable cost per unit (1) R13,20 R11,00 R10,00

% increase (2) 20% 10% –
(1) 87 120 / 6 600 = 13,20; 77 000 / 7 000 = 11,00; 60 000 / 6 000 = 10,00
(2) (11,00 – 10,00) / 10,00 × 100 = 10%; (13,20 – 11,00) / 11,00 × 100 = 20%
40
Inventories
Units produced 20.5 20.4 20.3
Opening inventory (7 000) (6 000) –

Sales 18 000 18 000 18 000
Closing inventory 6 600 7 000 6 000
Production 17 600 19 000 24 000
Fixed production overheads for 20.3 to 20.5 Rand
20.5 (as calculated) 86 000

20.4 (20% increase – 86 000 / 120 × 100) 71 667
20.3 (10% increase – 71 667 / 110 × 100) 65 152
Fixed production overheads to be included for 20.3 to 20.5 Rand
20.5 (86 000 / 25 000) × 6 600 22 704

20.4 (71 667 / 25 000) × 7 000 20 067
20.3 (65 152 / 25 000) × 6 000 15 636
Value of inventory, including fixed production overheads at 31 December
20.5 20.4 20.3

Rand Rand Rand
Variable costs allocated 87 120 77 000 60 000

Fixed production overheads allocated 22 704 20 067 15 636
Total 109 824 97 067 75 636
The following information has been extracted from the trial balance of Tech Ltd, a
manufacturer with a reporting date of 31 December 20.6:
Rand
Dr/(Cr)
Sales (800 000)

Opening inventory
Finished goods 80 000
Work in progress 30 000
Raw materials 50 000
Purchase of raw materials 180 000
Variable production costs
Labour and overheads 120 000
Fixed production overheads 100 000
Additional information
1. During the year there was an abnormal spillage of raw materials of R20 000.
2. Fixed production overheads are allocated at R2 per unit based on a normal capacity of
50 000 units. The actual production for 20.6 was 40 000 units.
41
Inventories
3. Closing inventory is as follows: Cost Net

realisable
value
Rand Rand
Raw materials 30 000 30 000

Work in progress 50 000 40 000
Finished goods 40 000 60 000
4. Other closing inventory is as follows: Cost

Rand
Stationery 10 000
Packaging materials 15 000
The net realisable value of the above is more than cost.
Tech Ltd uses the first-in, first-out method to value inventory.
Required
Prepare the disclosure related to all matters of inventories in the financial statements of Tech
Ltd for the reporting date 31 December 20.6 in compliance with the requirements of
International Financial Reporting Standards (IFRS).
Disclosure
TECH LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20.6
Note Rand
ASSETS
Current assets
Inventory 2 145 000
TECH LTD
EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 20.6
Rand
Revenue 800 000

Cost of sales (calc 4) (440 000)
Gross profit 360 000
42
Inventories
TECH LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.6
1. Accounting policy
1.1 Inventory
Inventory is valued at the lower of cost and net realisable value. Cost is assigned using
the first-in, first-out cost formula.
2. Inventory Rand
Consumable goods 25 000

Work in progress (calc 2) 50 000
145 000
Calculations
1. Raw materials Rand

Purchases 180 000
Write off of abnormal spillage (20 000)
Closing inventory (30 000)
Transferred to work in progress 180 000
2. Work in progress Rand

Raw materials (calc 1) 180 000
Variable production overheads 120 000
Fixed production overheads (1) 80 000
Closing inventory (2) (50 000)
Transferred to finished goods 360 000
(1) 40 000 × 2,00 = 80 000

(2) No adjustment is made for the net realisable value of work in progress as the
finished goods in which they will be incorporated are expected to be sold at or
above cost based on the comparison of cost and net realisable value of finished
goods at 31 December 20.6. Refer to IAS 2.32.
3. Finished goods Rand

Transferred from work in progress 360 000
Closing inventory (40 000)
Cost of finished goods 400 000
43
Inventories
4. Cost of sales Rand
Cost of finished goods (calc 3) 400 000

Raw material abnormal spillage 20 000
Under recovery of fixed production overheads (3) 20 000
440 000
(3) 100 000 – 80 000 = 20 000
Dumela Ltd purchases computer equipment. Some of this equipment is sold to customers as
part of stand-alone computer installations, while the other computer equipment is installed
by Dumela Ltd in a specific manufacturing plant.
Dumela Ltd currently uses the same cost formulas to value its entire computer inventory.
Required
Discuss, in terms of IAS 2, whether it will be allowed to value the stand-alone computer
equipment differently from the computer equipment used in the manufacturing plant.
Paragraph 25 of IAS 2 requires that either one of two cost formulas (FIFO or weighted
average) may be used to value inventories which have a similar nature and use to an entity.
Paragraphs 25 and 26 of IAS 2 state that where items of inventory have a different nature or
use to the entity, different cost formulas may be justified. However, a difference in
geographical location of inventories is, by itself, not sufficient to justify the use of different
cost formulas.
Dumela Ltd, therefore, could apply one cost formula to the computer equipment sold as
stand-alone computer equipment to customers and another cost formula to the computer
equipment installed in the manufacturing plant. This treatment is allowed since the computer
equipment has a different use in each case.
Zela Ltd was incorporated on 3 January 20.2.
The following information was extracted from the financial records of Zela Ltd for the
reporting date 31 December 20.2:
 Joint products
Total manufacturing cost (material, labour and overheads) to produce 15 000 kg of

finished goods Joint Product 1 (JP1) and Joint Product 2 (JP2) amounted to R150 000.
44
Inventories
The 15 000 kg of finished goods represents 5 000 kg of JP1 and 10 000 kg of JP2. The
net realisable value of both products is in excess of their cost.
At 31 December 20.2, there are 1 000 kg of JP1 and 2 000 kg of JP2 on hand.
 By-product
Product Y and by-product YY are produced during the manufacturing process of

Product Y.
By-product YY can be sold for R3 per unit while Product Y can be sold for R30 per
unit.
The total cost of manufacture of Product Y is R25 per unit.
At 31 December 20.2, there are 10 000 units of Product Y and 100 units of by-product
YY on hand.
Required
Calculate the value of the inventory items on hand as at 31 December 20.2 of Zela Ltd in
accordance with the requirements of International Financial Reporting Standards (IFRS).
Joint products Rand
JP1 (1) 10 000

JP2 (2) 20 000
30 000
(1) (5 000 / 15 000 × 150 000) × 1 000 / 5 000 = 10 000

(2) (10 000 / 15 000 × 150 000) × 2 000 / 10 000 = 20 000
Primary product Rand

Y (1) 249 700
(1) 10 000 × 25 = 250 000 – (100 × 3) = 249 700
By-product Rand
YY (1) 300
(1) 100 × 3 = 300
Babe Ltd began operations on 5 January 20.4. The following costs were incurred during the
year ended 31 December 20.4:
45
Inventories
Rand
Raw materials purchased 125 000

Direct labour 300 000
Variable production overheads (administrative: 20%; manufacturing: 80%) 250 000
Fixed production overheads 500 000
The level of normal production was expected to be 100 000 units for the year ended
31 December 20.4, whereas the actual level of production was 80 000 units for this period.
Of the raw materials, 80% have been used in the manufacturing process during the year.
Work in progress represents 20% of the total manufacturing costs at 31 December 20.4.
As at 31 December 20.4, 60% of those goods that were finished were sold at cost plus a
10% mark-up.
At year end it was apparent that the entire balance of finished goods could be sold for
R400 000, the entire balance of work in progress could be sold for R220 000 (assuming that
the work in progress will be completed at a further cost of R50 000 and selling costs of
R5 000 will be incurred), and the entire inventory of raw materials could be sold ‘as is’ for
R26 000 (no further costs will be incurred).
Required
a. Calculate the cost per class of inventory at 31 December 20.4 so as to comply with the
b. Calculate the net realisable values per class of inventory at 31 December 20.4 so as to
comply with the requirements of International Financial Reporting Standards (IFRS).
c. Prepare the notes related to all matters of inventories in the financial statements of
Babe Ltd for the year ended 31 December 20.4 so as to comply with the requirements
of International Financial Reporting Standards (IFRS).
a. Cost per class of inventory Rand

Raw materials at 31 December 20.4

Raw material purchased 125 000
Transfer to work in progress (1) (100 000)
Closing inventory 25 000
(1) 125 000 × 80% = 100 000
Total cost of manufacturing at 31 December 20.4

Raw materials used 100 000
Direct labour 300 000
Variable production overheads (1) 200 000
Fixed production overheads (2) 400 000
Total cost of manufacturing 1 000 000
(1) 250 000 × 80% = 200 000

(2) 500 000/100 000 × 80 000 = 400 000
46
Inventories
Rand
Work in progress at 31 December 20.4
Closing inventory (1) 200 000
(1) 1 000 000 × 20% = 200 000
Finished goods at 31 December 20.4

Goods finished during 20.4 (1) 800 000
Goods already sold (2) (480 000)
Closing inventory 320 000
(1) 1 000 000 × 80% = 800 000

(2) 800 000 × 60% = 480 000
b. Net realisable value per inventory class Rand

Work in progress (1) 165 000
(1) 220 000 – 50 000 – 5 000 = 165 000
c. BABE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.4
1. Accounting policies
1.1 Inventories
Inventory is measured at the lower of cost and net realisable value using the weighted
average cost formula.
2. Inventories 20.4
Rand

Work in progress (1) 165 000

510 000
(1) Work in progress is valued at net replacement value.
Pices Ltd has the sole right to distribute a certain product in Gauteng. The product is
purchased from the manufacturer and sold at a mark-up of 25% on the cost of the purchase
before any discounts are taken into account.
Pices Ltd always pays the manufacturer 10 days after the receipt of the product, because
they are then entitled to a 5% settlement discount.
47
Inventories
A large customer placed an order for products to the value of R100 000 (sales price) with
Pices Ltd. Pices Ltd purchased the products from the manufacturer and delivered them to
the customer.
Required
a. Prepare the journal entries for the purchase and sale transactions in the records of
Pices Ltd if the customer pays cash on the date of delivery and a cash discount of 10%
is given.
b. Prepare the journal entries for the sale transaction in the records of Pices Ltd if the
customer usually pays 10 days after the product is delivered to the customer and a
settlement discount of 10% is given.
a. Purchase transaction Rand

Dr/(Cr)
Inventory (P or L) (1) 76 000
Creditor (80 000)
Allowance for settlement discount (SFPos) 4 000
Creditor 80 000
Bank (76 000)
Allowance for settlement discount (SFPos) (4 000)
(1) 100 000 × 100 / 125 = 80 000
80 000 × 95% = 76 000
Sale transaction Rand

Dr/(Cr)
Bank (2) 90 000
Sales (P or L) (90 000)
Cost of sales (P or L) 76 000

Inventory (76 000)
(2) 100 000 × 90% = 90 000
b. Sale transaction Rand

Dr/(Cr)
Debtor (3) 100 000
Sales (P or L) (90 000)
Allowance for settlement discount (SFPos) (10 000)
Bank 90 000
Debtor (100 000)
Allowance for settlement discount (SFPos) 10 000
Cost of sales (P or L) 76 000

Inventory (76 000)
(3) 100 000 × 90% = 90 000
48
Inventories
The following information is available in respect of Dolo Ltd, a manufacturing concern:
Calculation of historical cost of manufactured inventory – per unit Rand
Raw materials (1 kg per unit) 625

Labour 225
Variable overheads 350
Fixed overheads 200
1 400
1. More competitors have entered the market resulting in the selling price being reduced
by R500 to R2 000. The R2 000 represents the average price at which finished goods
can be sold.
2. Delivery costs of products sold amount to 20% of the selling price.
3. Commission payable on sales is calculated at 15% of the selling price.
Required
Calculate the net realisable value per unit of inventory of Dolo Ltd in accordance with the
Daisy Ltd manufactures and sells a specific product. Purchases of raw materials are done
every Monday and amount to 15 000 tons per week. The supplier’s price for the raw
materials was R1 000 per ton for the first semester of 20.5, but it increased on 1 July 20.5 to
R1 500 per ton and then stayed constant until 1 February 20.6, after which the price
decreased to R1 300 per ton. Additional customs tax of R100 per ton and transport costs to
the company's factory of R200 per ton are also paid.
The following production information is available for the reporting date 31 December 20.5:
 Normal capacity per week 15 000 ton

 Variable production overheads R250 per ton
 Fixed production overheads based on the normal capacity of
the facility R300 000 per week
There is no loss in tonnage during the production process.
The finished goods are marketed at R2 400 per ton. Costs to sell amounted to R30 000 per
week and delivery costs amounted to R70 per ton.
There was no inventory on hand at the beginning of the year, but at 31 December 20.5 there
were 50 000 tons of raw materials and 2 000 tons of finished goods on hand. It is expected
that the costs to sell and deliver as mentioned above will still be valid for 20.6.
49
Inventories
Required
a. Calculate the value of finished goods, closing inventory at 31 December 20.5 so as to

b. Calculate the value of raw materials, closing inventory at 31 December 20.5 so as to
c. Indicate if your answer in b. will be influenced if the sales price of the finished goods
decreased to R2 300 per ton due to the decrease in the cost of raw materials.
Egoli Ltd has its head office in Gauteng and owns a factory in Mpumalanga. The company
manufactures a product known as ‘Gold star’ at the factory in Mpumalanga as there is
surplus unskilled labour available. The raw materials are transported to Mpumalanga from
Gauteng. A small quantity of the product is sold in Mpumalanga while the remainder is sent
to Gauteng for sale.
The following information was obtained from the factory's records on 31 December 20.6:
Rand
Dr/(Cr)
Sales – 80 units ‘Gold star’ (2 000)

Machinery – at cost 110 000
Purchased on 30 June 20.4 60 000
Purchased on 30 June 20.6 50 000
Accumulated depreciation – 31 December 20.5 (18 000)
Loan (concluded to purchase machinery on 30 June 20.6, bearing interest at
10% per annum, repayable in full on 30 June 20.9) (50 000)
Interest paid on loan 2 000
Salaries and wages for production 250 000
Transport costs for 2 000 units of ‘Gold star’ to Gauteng 28 000
Administrative expenses paid 40 000
On 31 December 20.6 the following information was extracted from the accounting records
of Egoli Ltd:
Rand
Sales – 1 600 units ‘Gold star’ 700 000

Cash 500 000
Credit 200 000
Raw materials for 2 800 units sent to Mpumalanga for production 56 000
Transport costs of the above 2 800 units 5 000
Administrative expenses paid 12 000
1. There were only finished units of ‘Gold star’ on hand at Egoli Ltd’s head office on
31 December 20.6. Only raw material inventory is on hand in Mpumalanga. There were
no inventory shortages, work in progress at the beginning or end of the year or opening
inventory of raw materials and finished goods.
50
Inventories
2. One unit of raw material is used to produce one unit of ‘Gold star’.
3. Machinery is depreciated using the straight-line method at 20% per annum.
Required
a. Calculate the value of the closing inventory of Egoli Ltd at 31 December 20.6 in
compliance with the requirements of International Financial Reporting Standards
(IFRS).
b. Calculate the profit or loss before tax of Egoli Ltd for the year ended
31 December 20.6 in compliance with the requirements of International Financial
Reporting Standards (IFRS).
Bleshoender Ltd was incorporated on 15 December 20.0. The accountant has requested your
assistance with the calculation and disclosure of inventory in the financial statements for the
year ended 31 December 20.1.
The company manufactures and sells poultry feed. Three basic raw materials, namely bone
meal, maize meal and a growth stimulant, are mixed in a predetermined ratio and are
prepacked in 10 kg bags. No loss in kilograms occurs during the process.
The following information is available:
Rand
Purchases: Bone meal 13 515

Maize meal 16 350
Growth stimulants 11 630
10 kg bags 1 790
Total variable production overheads 8 400
Total fixed production overheads 6 375
Distribution costs 3 000
1. Closing inventory at 31 December 20.1 is as follows:
Bone meal 450 kg

Maize meal 750 kg
Growth stimulants 300 kg
Finished products 100 bags
There is no work in progress closing inventory.
2. The normal capacity for the plant for the period under review is 850 bags.
3. The bone meal, maize meal, growth stimulants and finished products are valued on the
FIFO basis and the 10 kg bags on the weighted average basis.
4. During the year the bags of feed were sold at R100 per bag. Due to the drought and
the resulting shortage of maize, it is anticipated that the cost per bag, as well as the
selling price per bag, will increase by at least R20 per bag.
51
Inventories
5. During the inventory count on 31 December 20.1 it was discovered that the closing
inventory of growth stimulants had been damaged and is no longer suitable for the
manufacturing of feed. A local farmer undertook to buy the damaged growth stimulant
at R3,00 per kg. Bleshoender Ltd is responsible for the delivery costs which are
estimated to be R270 in total.
6. The current tax rate is 28%. Assume that all costs are tax deductible.
The accountant of Bleshoender Ltd has prepared the following schedule giving details of the
purchases:
PURCHASES OF INVENTORY
Bone meal Rand
1. 17/09/20.1 300 kg × R5,00 = 1 500,00

2. 25/10/20.1 600 kg × R5,25 = 3 150,00
3. 15/11/20.1 900 kg × R5,30 = 4 770,00
4. 01/12/20.1 450 kg × R5,40 = 2 430,00
5. 20/12/20.1 300 kg × R5,55 = 1 665,00
2 550 kg × *R5,30 = 13 515,00
Maize meal Rand
1. 18/09/20.1 500 kg × R3,50 = 1 750,00

2. 20/10/20.1 1 000 kg × R3,75 = 3 750,00
3. 17/11/20.1 1 500 kg × R3,90 = 5 850,00
4. 15/12/20.1 1 250 kg × R4,00 = 5 000,00
4 250 kg × *R3,85 = 16 350,00
Growth stimulant Rand
1. 17/09/20.1 200 kg × R7,00 = 1 400,00

2. 01/11/20.1 800 kg × R7,10 = 5 680,00
3. 17/12/20.1 700 kg × R6,50 = 4 550,00
1 700 kg × *R6,84 = 11 630,00
10 kg bags Rand
1. 25/09/20.1 300 × R1,70 = 510,00

2. 13/10/20.1 500 × R1,80 = 900,00
3. 30/11/20.1 200 × R1,90 = 380,00
1 000 × *R1,79 = 1 790,00
* Average price per kg
Required
a. Indicate how inventory and all matters relating to inventory must be disclosed in the
financial statements of Bleshoender Ltd for the year ended 31 December 20.1 so as to
52
Inventories
b. Assume Bleshoender Ltd has two branches, one in East London and another in
Nelspruit. At financial year end, each branch has unsold inventory on hand. The
inventory on hand at the East London branch is valued on the weighted average basis
while that at the Nelspruit branch is valued on the first-in, first-out basis.
Is the use of these different methods of valuation permitted in terms of IAS 2?

53

Inventories: Lecturers Containing The Suggested Solutions For Questions Without Answers

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IAS 2

 QUESTIONS AND SOLUTIONS

IAS 2.1 Measurement of inventories – cost of conversion

 QUESTION IAS 2.1

Opening inventory (pairs of takkies in rand value) 160 000

Unemployment insurance fund contributions (UIF) 30 000

 Suggested solution IAS 2.1

Closing inventory Pairs of

Opening inventory 20 000

Allocation of fixed production overheads Rand

Total fixed production overheads 619 600

(1) 42 000 × 20% = 8 400

Allocation of variable production overheads Rand

Total variable production overheads 275 000

Repairs and maintenance – plant (1) 60 000

(1) 150 000 × 40% = 60 000

Unit cost of finished goods Rand

Raw materials (1) 2,50

(1) 1 375 000 / 550 000 = 2,50

Inventory valuation Rand

Closing inventory (1) 255 900

(1) 30 000 × 8,53 = 255 900

 QUESTION IAS 2.2

Units manufactured 10 000

than 10 000) are sold at R800 per unit.

On 31 December 20.3, inventory on hand of Blush was as follows:

Units contracted for 6 800 1 600

Raw material ‘Dol’

a. Calculate the value of inventory of Rascall Ltd at 31 December 20.3.

 Suggested solution IAS 2.2

a. Inventory valuation Rand

Telebunken radios (1) 2 565 000

Product Blush (2) 7 920 000

(1) 450 × 5 700 = 2 565 000

b. Amounts written off Rand

Telebunken radios (1) 285 000

(1) 5 700 × (500 – 450) = 285 000

Amounts written back Rand

Product Jax (1) 1 200 000

(1) 1 200 × [3 000 – 2 000] = 1 200 000

 QUESTION IAS 2.3

1 Inventory on hand: 20 units – 14 at R180 each

The selling price during April amounted to R600 per unit.

 Suggested solution IAS 2.3

a. Cost of inventory and inventory on hand

Cost of sales (calc 1) Rand

Cost of inventory sold 48 220

Closing inventory Rand

Net realisable value (1) 46 000

(1) 115 × (500 – 100) = 46 000

ii. Weighted average cost method

Cost of sales (calc 2) Rand

11 April 20.6 9 330

Revenue (1) 84 000 84 000

(1) (30 + 50 + 60) × 6 = 840

1. FIFO cost formula Number of Price p.u. Total

1 April Balance 14 180 2 520

2. Weighted average cost formula Number of Price p.u. Total

1 April Balance 14 180 2 520

(1) 35 720 / 115 = 311

 QUESTION IAS 2.4

The following information is provided:

 Market demand per annum – 18 000 units