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Questions and Answers
Which of the following costs is directly related to the units of production?
What is the basis for allocating fixed production overheads to the costs of conversion?
Which of the following costs should not be recognized as part of the cost of inventories?
What is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale?
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Which of the following is an example of other costs that should only be recognized if they are incurred in bringing the inventories to their present location and condition?
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What is the specific identification method used for items that are not ordinarily interchangeable?
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Which of the following is a cost that is excluded from the cost of inventories?
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What is the basis for allocating fixed production overheads to the costs of conversion when the actual level of production approximates normal capacity?
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Which of the following is not a cost directly related to the units of production?
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What is the purpose of allocating fixed production overheads to the costs of conversion?
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Study Notes
LKAS 2: Inventory
- Objective: To prescribe accounting treatment for inventories, including determination of cost and subsequent recognition as an expense, including any write-down to net realisable value.
Scope
- Exclusions from the standard:
- Work in progress under construction contracts (covered by SLFRS 15)
- Financial instruments (covered by SLFRS 9)
- Livestock, agricultural and forest products, and mineral ores (covered by LKAS 41)
Definition of Inventories
- Assets held for sale in the ordinary course of business
- In the process of production for such sale
- In the form of materials or supplies to be consumed in production or rendering of services
Measurement of Inventories
- Measured at the lower of cost and net realisable value (NRV) for each separate item or group of inventory items
Cost of Inventories
- Comprises:
- Cost of purchase
- Costs of conversion
- Other costs incurred in bringing inventories to their present location and condition
Cost of Purchase
- Purchase price
- Import duties and other taxes
- Transport, handling, and other costs directly attributable to acquisition of finished goods, services, and materials
- Less: trade discounts, rebates, and other similar items
Costs of Conversion
- Cost of inventories may not be recoverable if:
- Damaged, obsolete, or selling price declined
- Estimated costs of completion or sale have increased
Net Realisable Value (NRV)
- Estimated selling price in the ordinary course of business
- Less: estimated costs of completion and estimated costs necessary to make the sale
- Situations where NRV < cost:
- Increase in costs or fall in selling price
- Physical deterioration of inventory
- Obsolescence of products
- Decision to manufacture and sell at a loss
- Errors in production or purchasing
Recognition as an Expense
- Carrying amount is recognised as an expense in the period in which the related revenue is recognised
Allocation of Fixed Production Overhead
- Based on normal capacity of production facilities
- Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances
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Description
This quiz covers the accounting treatment for inventories, including the determination of cost and its subsequent recognition as an expense, and any write-down to net realizable value.
