Professional Documents
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NATURE OF INVENTORIES
COST OF CONVERSION
It includes costs directly related to the units of
production, such as direct labor.
They also include a systematic allocation of fixed
and variable production overheads.
Fixed
Indirect costs that remain relatively constant
regardless of the production.
Variable
Indirect costs of production that may vary
directly or nearly directly with the volume of
production.
COST OF INVENTORIES OF A
SERVICE PROVIDER
Consist primarily of the labor and other costs of
personnel directly engaged in providing the
service
COST OF AGRICULTURAL PRODUCE
HARVESTED FROM BIOLOGICAL ASSET
measured on initial recognition at their fair value
less cost to sell at the point of harvest
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.
EXCLUSIONS FROM COST OF INVENTORIES
Abnormal amounts of wasted materials, labor, or other
production costs
Storage costs, unless those costs are necessary in the
production process before a further production stage.
Administrative overheads that do not contribute to
bringing inventories to their present location and
condition.
Selling costs b(IAS 2, Inventories, paragraph 16)
Labor and other costs relating to sales and general
administrative personnel
Financing element involved in purchases under deferred
payment arrangement (IAS 2, inventories, paragraph 18)
GUESS THE WORDS
ITEMS TO BE INCLUDED IN
INVENTORY QUANTITIES
Goods in Transit
FOB destination
Legal title is not transferred until the goods
TERMS OF
SHIPMENT DISPOSITION
Seller Buyer
FOB shipping Exclude Include
point
FOR destination Include Exclude
Freight Collect
Freight charge on the goods shipped is not yet paid.
Purchases xx
Add Freight in xx
Less Purchase Discount, xx
Returns, and Allowances
Net Cost xx
Pro-Forma Entries to record transactions using periodic
inventory system:
Cost of Sales XX
Merchandise Inventory XX
Sales Returns Sales Returns XX
Accounts Receivable/Cash XX
Merchandise Inventory XX
Cost of Sales XX
GUESS THE WORDS
PRINCIPLE CONCERNING
MEASUREMENT OF INVENTORY
Paragraph 9 provides that inventories shall be measured at
lower of cost and net realizable value or LCNRV
Paragraph 25 provides that the cost of inventories shall be
determined by using either the FIFO method/ weighted
average method.
PAS 2 prohibits the use of LIFO costing
Paragraph 3 provides that the cost of inventories that are
not ordinarily interchangeable and inventories that are
segregated for specific projects shall be determined by
using specific identification method.
SPECIFIC IDENTIFICATION METHOD
The cost of inventories that are not ordinarily
interchangeable and inventories that are segregated for
specific projects
The cost of inventory can be determined by multiplying
the units on hand by their actual units.
WEIGHTED AVERAGE
This method considers goods to be undistinguishable and
are, therefore, valued at an average of the costs incurred.
MOVING AVERAGE CAPITAL (PERPETUAL)
This method requires a computation of new unit cost
after each purchase an subsequent issues are priced at
the latest average unit.
WEIGHTED AVERAGE METHOD (PERIODIC)
Under the weighted average formula, the cost of each item is
determined from the weighted average cost of similar items at the
beginning of a period and the cost of similar items purchased or
produced during the period.
EXAMPLE:
Gross Profit
Sales 7000 x 130 910,000
16000 x 135 2,160,000
Less Cost of goods sold 1,211,000
Total cost of of goods sold 1,859,000
First in First Out
Gross Profit
Sales 3,070,000
Less Cost of goods sold 1,201,000
Total cost of of goods sold 1,869,000
Weighted Average Method (Periodic)
Gross Profit
Sales 3,070,000
Less Cost of goods sold 1,226,140
Total cost of of goods sold 1,843,860
Moving Average Method (Perpetual)
Transactio Received Issued Balance
n
1 2,000@50 = 100,000
2 18,000@52 = 936,000 20,000@51.80 =
1,036,000
3 7,000@51.80 = 362,600 13,000@51.80 =
673,400
4 6,000@55 = 330,000 19,000@52.81 =
1,003,400
5 16,000@52.81 = 3,000@52.81 =
844,960 158,400
6 3,000 @ 60 = 180,000 6,000@56.41 =
338,440
Cost of ending inventory = 338,440
Cost of Goods Sold = 362,600 + 844,960 = 1,207,560
Gross Profit = 3,070,000 - 1,207,560 = 1,862,440
GUESS THE WORDS
PURCHASE COMMITMENTS
Obligations of an entity to acquire certain goods sometime
in the future at a fixed price and at a fixed quantity.
Purchase Commitments may be subject to revision or
cancellation before the and of contract period.
If there is a decline in purchase price after a
noncancelable purchase commitment has been made, a
loss is recorded in the period of the pricedecline
If the market price rises by the time the entity makes the
purchase, a gain on purchase commitment would be
recorded.
However, the amount of gain is limited to the recorded in
the previous period for same purchase commitment.
Illustration:
Assume that on October 1,2012. ABC entered into a non-
cancelable commitment to purchase six months after date,
100,000 units of an inventory item at 10 each. On
December 31, 2012, the average purchase price of an
inventory item is 9.00 per unit.
Entries:
Loss on Purchase Commitments 100,000
Estimated Liability on Purchase Commitments 100,000