INVENTORY COST

FLOW AND
FORMULAS
 IAS 2 - Inventories
 Main issue – Determination of the amount to be
recognized as an asset (Inventory, ending balance) and the
amount to be recognized as an expense (Cost of goods
sold).

 The cost of goods available for sale is allocated between the

cost of goods sold and the ending inventory by means of a
cost flow assumption.
 IAS 2 - Inventories

Inventory, Beginning Balance XXX

Add: Purchases XXX

Total Goods Available for Sale XXX

Less: Inventory, Ending Balance XXX

Total Cost of Goods Sold XXX

 How much are the
total available goods
for sale?
 IAS 2 - Inventories

 The standard cost and retail methods may be used for the
measurement of cost, provided that the results
approximate actual cost. [IAS 2.21-22]

 For inventory items that are not interchangeable, specific

costs are attributed to the specific individual items of
inventory. [IAS 2.23]
 IAS 2 - Inventories
 Specific identification of cost

 Specific costs are attributed to identified items of

inventory.

 Appropriate treatment for items that are segregated

for a specific project, regardless of whether they have
been bought or produced.

 Requires a means of identifying the historical cost of

each unit of inventory up to the time of sale.
 Specific Identification of Cost
The inventory records of Maharlika Corporation disclose the following information
for the year 2021:
Transaction Unit Unit Cost

1. Inventory 2,000 50

2. Purchases 18,000 52

3. Sales (at P130 per unit) 7,000

4. Purchases 6,000 55

5. Sales (at P135 per unit) 16,000

6. Purchases 3,000 60

Sales under no. 3 originated from the company’s purchases under no. 2. Sales
under no. 5 originated from no. 2 and no. 4 for the remaining balance.
 Specific Identification of Cost
Cost of ending inventory:

From No. 1 (2,000 x P50) P 100,000

From No. 4 (1,000 x P55) 55,000

From No. 6 (3,000 x P60) 180,000

Inventory, Ending Balance P 335,000

 Specific Identification of Cost
Cost of goods sold:

No. 3 Sales (7,000 x P52) P 364,000

No. 5 Sales (11,000 x P52) 572,000

No. 5 Sales (5,000 x P55) 275,000

Total Cost of Goods Sold P 1,211,000

 Specific Identification of Cost
Gross Profit:

Sales (7,000 x P130) P 910,000

Sales (16,000 x P135) 2,160,000

Less: Cost of Goods Sold (1,211,000)

Gross Profit P 1,859,000

 IAS 2 - Inventories

 The cost of inventories of items that are not ordinarily

interchangeable and goods or services produced and segregated
for specific projects shall be assigned by using specific
identification of their individual costs.

 Specific identification of cost means that specific costs are

attributed to identified items of inventory. This is the appropriate
treatment for items that are segregated for a specific project,
regardless of whether they have been bought or produced.
However, specific identification of costs is inappropriate when
there are large numbers of items of inventory that are ordinarily
interchangeable. In such circumstances, the method of selecting
those items that remain in inventories could be used to obtain
predetermined effects on profit or loss.
 IAS 2 - Inventories

 For items that are interchangeable, IAS 2 allows the FIFO or

weighted average cost formulas. [IAS 2.25] The LIFO
formula, which had been allowed prior to the 2003 revision
of IAS 2, is no longer allowed.

 The same cost formula should be used for all inventories

with similar characteristics as to their nature and use to the
entity.

 For groups of inventories that have different characteristics,

different cost formulas may be justified. [IAS 2.25]
 IAS 2 - Inventories

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

 Under the weighted average cost formula, 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 entity.
FIFO
FIFO – Periodic
FIFO – Periodic
FIFO – Periodic
FIFO – Periodic
FIFO – Perpetual
FIFO – Perpetual
LIFO
LIFO – Periodic
LIFO – Periodic
LIFO – Periodic
LIFO – Periodic
LIFO – Perpetual
LIFO – Perpetual
WEIGHTED
AVERAGE
Weighted Average – Periodic
Weighted Average – Periodic
Weighted Average – Periodic
Weighted Average – Perpetual
Weighted Average – Perpetual
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