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Inventories

The document discusses inventories for different types of businesses. For manufacturing businesses, inventories include raw materials, work-in-process, and finished goods. Trading businesses hold inventories for sale. The costs of inventories include purchase costs, transport and handling costs, and conversion costs like direct labor and allocated production overheads. Costs must be reasonably attributable to bringing inventories to their present condition and location to be included.

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DANIELLE TORRANCE ESPIRITU
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21 views

Inventories

The document discusses inventories for different types of businesses. For manufacturing businesses, inventories include raw materials, work-in-process, and finished goods. Trading businesses hold inventories for sale. The costs of inventories include purchase costs, transport and handling costs, and conversion costs like direct labor and allocated production overheads. Costs must be reasonably attributable to bringing inventories to their present condition and location to be included.

Uploaded by

DANIELLE TORRANCE ESPIRITU
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Torrance Espiritu

INVENTORIES

Read IAS 2/PSA 2


○ IAS2

Inventory
● Manufacturing Company
○ Raw Materials Inventory
○ Work in Process Inventory
○ Finished Goods Inventory
● Trading/Merchandising
○ Buy goods and selling these goods without alterating such
○ Inventory: Merchandising Inventory
● Like Accounts Payable
○ Credited

Type of Business
● Trading Business: one that buys goods and sells these goods without altering the form of
the goods (no production process is being undertaken)
○ Inventories: Held for sale in the ordinary course of business
● Manufacturing Business: Uses raw materials to assemble/produce finished goods; their
inventories consist of:
○ Finished Goods Inventory: Held for sale in the ordinary course of business
○ Work-In-Process Inventory: In the process of production for such sales
○ Raw Materials Inventory: In the form of materials or suppliers to be consumed in
the production process or in the rendering of services

Joint Products
● A production process may result in more than one product being produced simultaneously.
This is the case when joint products are produced or when there is a main product and a
by-product.
● When the costs of conversion of each product are not separately identifiable, they are
allocated between the products on a rational and consistent basis.
● The allocation may be based on the relative sales value of each product either at the stage
in the production process when the products become separately identifiable or at the
completion of production.
● Most by-products by their nature are immaterial. When this is the case, they are often
measured at net realizable value and this value is deducted from the cost of the main
product. As a result, the carrying amount of the main product is not materially different
from its cost.

Cost of Inventories
● Costs of Purchase
1. Purchase Price (Bukod pa ‘yung patong and taxes)
2. Import duties and other taxes other than those subsequently recoverable by
the entity from the taxing authories
➢ Recoverable: Pwedeng magamit pampabawas ng mga utang natin (buyer)
sa BIR (Binabawasan Taxes Payable natin)
➢ Not Recoverable: Cannot be recovered from BIR/Taxing Authority, these
taxes can be capitalized as part of the cost of your purchases/inventory
➢ Illustration
Torrance Espiritu

3. Transport, Handling
➢ Transport: FOB Shipping Point, FOB Destination
➢ Handling: Insurance if ever na ma-lost in transit si parcel (Capitalizable
HAHAHAHA)
4. Other costs directly attributable to the acquisition of inventories only to the
extent that they are incurred in bringing the inventories to their present
location and condition
➢ Additional expenses in bringing the inventories to their present location and
condition (Capitalizable)
➢ Is it a necessary cost? If not, it is an expense not capitalizable.
5. Less trade discounts and rebates
➢ List Price - Trade Discount = Gross Purchase Price
➢ Illustration:

➢ Problem 1-1: Crossings Company regularly buys merchandise from Best


Company and is allowed a trade discount of 20% and 10% from the list
price. Crossings made a purchase on March 20, 2022 and received an
invoice with a list price of 150,000, a freight charge of 2,500 and payment
terms of net 30 days. What is the total cost of merchandise purchases?
➢ Purchase Price: 150,000 * 0.90 * 0.80 = 108,000
➢ Purchase Price: 108,000 + 2,500 = 110,500
➢ Freight and insurance costs are added to the purchase price since
this costs are incurred before the purchased material is processed
(e.g. delivery expense from seller of raw materials to buyer who will
manufacture the raw material)

● Costs of Conversion
1. Direct Labor
2. Production Overhead Costs
■ Allocation of Fixed Production Overheads
➢ This is based on the normal capacity of the production facilities.
➢ Normal capacity is the production expected to be achieved on the
average over a number of periods under normal circumstances
taking into account the loss of capacity resulting from planned
maintenance.
➢ In the process of production for such sales; or
➢ In the form of materials or supplies to be consumed in the
production process or in the rendering of services
➢ The amount of fixed overhead allocated to each unit of production
is not increased as a consequence of low production or idle plant.
Unallocated overheads are recognized as expense in the period in
which they are incurred.
➢ In periods of abnormally high production, the amount of fixed
overhead allocated to each unit of production is decreased so that
inventories are not measured above cost.

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