IAS-2 Inventories ( Measurement of cost)

IAS-2 Inventories (Accounting treatment)

Inventories shall be measured at the lower of cost and net realisable value.

Net realisable value 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.

The cost of inventories shall comprise all :

costs of purchase,

costs of conversion and

other costs incurred in bringing the inventories to their present location and condition.

Inventory cost should not include:

abnormal waste

storage costs

administrative overheads unrelated to production

selling costs

foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency

interest cost when inventories are purchased with deferred settlement terms.

Illustration 1

ABC ltd record shows the following data regarding abc material.

Invoice value of $ 1,000 ( Net of Trade discount $ 2)

Freight $5

Storage cost $ 1

Compute the cost of material to be recognised as per IAS -2

Solution:

Cost of material:

costs of purchase $ 1,000 + Freight $5 = $ 1,005

Storage cost is not included as per IAS-2

costs of purchase (including taxes, transport, and handling) net of trade discounts received.

Standard cost & retail method

The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual cost.

Specific costs.

For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory.

For items that are interchangeable:

IAS 2 allows the FIFO or weighted average cost formulas.

(Fifo & weighted average illustration as per above.)

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