IAS 2– INVENTORY

IAS 2– Inventory
Principles

Inventories are valued at the lower of cost and net

realisable value (NRV).

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 IAS 2– Inventory
Costs of inventory

Cost is the cost of bringing items of inventory to their

present location and condition (including cost of purchase
and costs of conversion).

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 IAS 2– Inventory

• purchase price including

import duties, transport and
Cost of
handling costs any other
purchase
comprises directly attributable costs,
less trade discounts, rebates
and subsidies.

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 IAS 2– Inventory

Cost of conversion comprises:

 costs which are specifically attributable to units of
production, e.g.
 direct labour, direct expenses and subcontracted work
 production overheads, which must be based on the
normal level of activity .
 other overheads, if any, attributable in the particular
circumstances of the business to bringing the product
or service to its present location and condition.

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 IAS 2– Inventory

Charged as expenses:
• abnormal waste
• storage costs
• administrative overheads which do not contribute to
bringing inventories to their present location and
condition
• selling costs.

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 IAS 2– Inventory

NRV 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.

Valuatio • actual unit cost

n • first in, first out (FIFO)
methods • weighted average cost (AVCO).

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 IAS 2– Inventory
Inventory valuation methods

the FIFO method

the AVCO method

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 IAS 2– Inventory

Disclosure requirements
• accounting policy adopted, including the cost formula
used
• total carrying amount, classified appropriately
• amount of inventories carried at NRV
• amount of inventories recognised as an expense during
the period
• details of any circumstances that have led to the write-
down of inventories to their NRV.

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 IAS 2– Inventory-Q1

High Co. manufactures component for TV

production.
Cost of raw materials per unit $100 but supplier
offered 15% trade discount
Labour costs per unit $25
Production overheads $400,000
Expected (normal) output 50,000 units
Actual output 40,000 units
What is the per unit cost of the component?

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 IAS 2– Inventory

Which of these costs may be included in the cost of

inventories of raw materials and purchased
components?
a/Import duties
b/Transport costs
c/Interest
d/Variable production overheads
e/Quantity discounts received

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