Professional Documents
Culture Documents
Standard 2..
Inventories/ Stock evaluation
1. Purchase costs
2. Conversion costs
3. Other costs
PURCHASE COST:
Comprises of:
- Purchase price
- Import duties
- Transport
- Handling
- Trade discounts
- rebates
CONVERSION COSTS:
- Direct labour, indirect variable and fixed
production overhead costs
- Variable production overhead: allocate to
inventory based on actual usage
- Fixed production overhead: allocate to
production based on normal operating capacity
(except when abnormally high production)
JOINT PRODUCTS:
A production process may result in the formation of one
product and a by-product called as joint product.
Cost of production of each product no separately
identifiable: allocate between rational and consistent
basis
By products if immaterable usually measured at NRV and
this NRV is deducted from main product costs
OTHER COSTS:
Other costs include those costs that are used in bringing
inventories to their location and condition
Example: non production overheads or cost of designing
products for specific customers in the cost for
inventories
Borrowing cost: in some specific conditions borrowing
costs (interest) can be included in inventory costs.
NOT INCLUDED:
IN INVENTORY COSTS:
Labour cost
Abnormal waste cost
Storage or warehousing cost unless needed for further
production
administrative overheads unrelated to production
selling costs
Financing charges above purchase price for normal
credit terms
COST MEASUREMENT
TECHNIQUES:
2 techniques use:
1. Standard cost method: used for accounts of normal
level of materials, supplies, labours, efficiency and
capacity utilization.
• Regularly reviewed methods.
2. Retail methods: used in retail industry for measuring
large number of rapidly changing items.
• cost is determined by reducing the sales value of
inventory by percentage gross margin.
COST FORMULA:
Assign recent costs to ending inventories
three types of cost formulas used depending upon the
nature of inventory
NOT Interchangeable inventory:
• specific cost formula
Interchangeable inventory:
• first-in, first out (FIFO)
• weighted average
SPECIFIC COST FORMULA:
this means that specific costs are attributed to
specific costs of inventory
used for non interchangeable items
For goods and services produced and segregated for
specific projects
this formula is inappropriate when there are large
number of items that are changeable
For same nature of inventories same cost formulas
should be used
For inventories with different natures different formulas
may be used.