Basic Inventory

NotesQuizObjective Test

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

What goes into 'cost'?

  1. Purchase price

  2. Conversion costs

  3. Costs to bring into current location & condition

What does NOT go into 'cost'

  • Abnormal amounts

  • Storage costs

  • Administration overheads

  • Selling costs

Illustration

Item A has the following costs:
Direct Labour 100
Raw Materials 200
Depreciation on production machines  10
Factory Manager wage 10
Other production Overheads 8
Admin Overheads  5

What is the 'cost'

Solution

328

Include everything except admin costs

Net Realisable Value

The net realisable value of an item is essentially its net selling proceeds after all costs have been deducted

It is calculated as follows..

Estimated selling price  X
Less: estimated costs of completion  (X)
Less: estimated selling and distribution costs   (X)
X
NotesQuizObjective Test