CIMA F1 Syllabus B. Financial Statements - Basic Inventory - Notes 1 / 1
Inventories should be measured at the lower of cost and net realisable value
What goes into 'cost'?
Purchase price
Conversion costs
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 |
Disclosure required as per IAS2
The entity must disclose the following things:
Total carrying amount of inventories
Accounting policies used when measuring the value of inventory
A breakdown of the total carrying amount of inventories into classifications appropriate to the entity