Inventory are the assets of the company, which is held to sale in the ordinary course of business; or in the process of production for sales and in form of material or suppliers to be consumed in the production process of in the rendering of services.
Measurement of inventories:
Inventories should measure the lower of cost and net realizable value (NRV).
This is a method of measurement for inventories if “cost” does not reflect the true value of the inventories. By applying the prudence concept, NRV will be used if it is lower than the “cost” of inventories.
Inventories comprises:
Inventory comprises by goods of purchase and held for re-sale; work-in-progress; finished goods. In case of services provider, inventories include the cost of services.
Cost of Inventories
Cost of inventories should be including all cost of purchase; cost of conversation and other costs.
All cost of purchase:
Cost of purchase mean purchase price, transportation charges, import duties, insurance fee, legal fee and other cost can directly applied to the acquisition of finished goods, materials and services, less trade discounts, rebates and other similar items.
Cost of conversation:
In a manufacturing environment, the concept of cost is rather complicated. Cost of conversion as costs directly related to the units of production, e.g. direct labour, direct expenses, sub-contracted work.
Systematic allocation of fixed and variable production overheads, e.g. depreciation and maintenance of factory equipment.
Fixed production overheads are allocated to the cost of conversion based on
the normal capacity of the production facilities.
Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume for production, such as indirect materials and indirect labour. Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.
Other cost
Other cost, if any, attributable to bringing the inventories to its present location and condition should be included.
Abnormal waste; storage costs; administrative overheads which do not contribute to bringing inventories to their present location and condition and selling cost should be exclude and charged as expenses of the period in which they are incurred.
Cost of inventories of services provider
The cost of inventories of a services provider comprise primarily of the labour and other costs of personnel directly immersed in providing the services, including supervisory personnel; and attributable overheads.
Labour and other costs relating to sales and general administrative personnel are not included but are recongnised as expenses in the period in which they are incurred.
Techniques for measurement of cost
Techniques for the measurement of the cost of inventories, suchlike standard cost method or the retail method, might used for the convenience if the result approached cost.
Standard cost take into account normal levels of materials and suppliers, labour, efficiency and capacity utilization. They are regularly reviewed and, if necessary, revised in the light of current conditions.
The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing item, that have similar margins and for which it is impracticable to use other costing methods. The cost of the inventory is determined by reducing the sales value of the inventory by the appropriate percentage gross margins. An average percentage for each retail department is often used.
Valuation methods
We have different method to prepare the valuation of inventories:
1. First-In-First-Out
2. Last-In-First-Out
3. Weighted Average Cost
4. Standard Cost
Where inventories consists of a number of identical items purchased at different times, an appropriate method for determining the value of inventories must be selected.
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