Procedures of determining cost of inventory under IAS 2.

IAS 2 inventories  was first issued on October 1975, and most recently revised in December 2003. Its most important principle is that inventories to be measured at lower of their cost and net realizable value. Cost is defined as cost of purchase, cost of conversion, plus any cost that are incurred in bringing the inventory items to their present location and condition.

Inventory cost should not include

  • abnormal cost
  • storage cost
  • administrative overhead unrelated to production
  • selling cost
  • foreign exchange differences arising directly  on the recent acquisition of inventories invoiced in foreign currency
  • interest cost when inventories are purchased with deferred settlement terms

Cost of purchase is deemed to include any import duties, irrecoverable purchase taxes, transport, handling and all other directly attributable cost of purchase. Trade discount are deducted but not settlement discounts. Cost of conversion include any directly attributable labour and overhead costs incurred in converting unit of raw materials to a finished product. They also include  a systematic allocation of production costs which are indirectly attributable to manufacturing  or conversion. Any apportionment of fixed overhead is based on normal output conditions.other costs may be included in certain circumstances, provided they are incurred in bringing the inventory items to their present location and condition.

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  1. Pingback: IAS 2- INVENTORIES - ALL YOU NEED TO KNOW. - ACCA ONLINE ACCOUNTING TEACHER

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