FAC2601

Presented by:
Andre Eysele
Topics to be presented:

LU 4: Inventory – IAS 2

Material:
• Lesson 4: Study Material
• IAS 2 – Additional Notes
• Ex: 3.9 (IAS 2 General Ledger Accounts –
Journals)
• Questions – All (Journal Transactions)
LU’s: Will be dealt with in following way
Agenda:

▪ Theory

▪ Inventory – Practical Application – We need to disclose this:

STATEMENT OF FINANCIAL POSITION AS AT 28 FEB 2020:

Current Assets:

Inventory (FG + RM + WIP) 550 000 (Lower of cost and or NRV)

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 28 FEB 2020:

Cost of sales (OS + Purch – CS) (250 000) (Finished Goods + Raw Material + WIP)

Gross Profit = Revenue – COS (Example 40% of Sales)

LEARNING UNIT 4 – INVENTORY IAS 2
Learning Unit 4 – Inventory IAS 2

• Measurement: Lower of cost and NRV (SP – cost of completion and cost necessary to
make the sale)(FV – CTS (discounts; sales comm; pack & transport)

• NRV: Is the estimated selling price which could be realised in the normal course of business less the
estimated costs to be incurred in order to complete the product and to make the sale.

• Cost: Cost involved in bringing the inventory to their present location and condition should be included in
the cost of inventory. (COS = the direct costs attributable to the production of the goods or services)

• WIP: Direct Lab / Direct Mat / VPO (No.of units) / FPO (Normal Capacity)

• VPO = (Factory power + Depreciation varies as production varies)

• FPO = (Property Tax + Rent does not varies as production varies)

How to measure inventory:

• Determining cost;

• Applying a cost allocation technique; (FIFO, Weighted Avg, Specific ID, Std Costing, Retail, NRV) – Ex.

• Determining NRV and

• Record inventory at the lower of cost and NRV at Normal Capacity.

 LU4 – INVENTORY IAS 2
Purchasing costs include: (Raw Materials) – Cost:
- Purchase price;
- Import duties and other appropriate taxes;
- Transport costs;
- Handling costs; and
- Any other costs directly attributable to the acquisition of the inventories.
Conversion costs: (Work In Progress)
Incurred in the conversion of raw materials into finished products and
include the following:
- Direct labour;
- Variable production overhead costs;
- Fixed production overhead costs based on normal capacity;
- Other costs
 LU 4: Inventory – IAS 2
Determine cost: B: Conversion Costs:
WIP C: Other costs:
A: Cost of Purchasing:
1) Variable Production 1) To bring inventory to
1) Cost Price; OVH; (Factory Power + Dep = Varies) present location and
2) Fixed Production OVH condition;
2) Import duties;
(Based on Normal cap) 2) Design costs;
3) Taxes; (Property Tax; Rent does not varies) 3) Normally excluded
1) Excluding abnormal (Selling admin and;
4) Any other cost rebates spillage convert RM in storage; interest
and discounts. FG related exp.)

By using allocation technique: 1) FIFO – First in first out;

2) Weighted Average; Inventory = Held for sale
EX: Cost allocation 3) Specific Identification; in the ordinary course of
4) Standard costing; business
5) Retail;
6) NRV;
 LU4 – INVENTORY IAS 2
Production overhead costs: Incurred in the manufacturing process, but do not
form part of direct material or direct labour costs. (Indirect materials and labour, rates
and taxes of a factory, depreciation on production) Included in costs of Inventories

Other overhead costs: Normally incurred in running the operations of an entity that
don’t relate to the production process. (Office rentals, salaries of admin personnel
selling ang marketing costs) Excluded.

The general principle is that only those costs involved in bringing the inventories to
their present location and condition should be included in the cost of inventories.
 LU4 – INVENTORY IAS 2
DEFINITION OF INVENTORY:

Held for sale in the ordinary course of business;

- In process of production for sale;

- Consumed during the production of saleable goods or services IAS 2 does not
apply to certain categories of inventories and also applies only partially to certain
inventories

- Measured at the lower of cost and net realisable value.

 LU4 – INVENTORY IAS 2
Types of costs and methods of computation:
Standard costs: Based on normal levels of operations, the expected costs are
estimated, by using predetermined information.

Retail method: Determine the values of inventories by using the selling price
and then reducing it by average profit margin, to get the cost.

First-in, first-out: Values on assumption that that items will be sold in the
order that they were purchased.

Weighted average method: Weighted average is calculated after each

purchase or periodically, by taking price and number of items into consideration.

Specific identification: Allocate costs to separately identified items that were

acquired or manufactured for a specific project.
 LU4 – INVENTORY IAS 2
Inventories are measured at lower of cost and Net Realisable Value:

Estimated selling price in normal course of business, less:

- Costs to complete the inventories;

- Trade and other discounts allowed;

- Advertising;

- Sales commission;

- Packaging costs;

- Transport costs;

A new assessment of net realisable value is made each financial year-end.

 LU4 – INVENTORY IAS 2
Disclosure:

- Accounting policy with regards to measurement and cost formula used;

- Total carrying amount of inventories, with applicable classification;

- Amount recognised as cost of sales in current financial year;

- Amount of any write-downs recognised as an expense;

- The reversal of any subsequent write-downs in previous financial period;

- Amount of any inventories pledged as security.

It is not required to disclose the fact that carrying amount of inventories is

at net realisable value.

 LU4 – Practical Example 2
The normal capacity of an entity is 200 000 units per annum. The raw material cost is R160/u
And direct labour is R100 per unit. Variable production overheads are R40 per unit, and fixed
production overheads incurred amounts to R3,000,000. The closing balance of finished goods is
7 500 units (assume there is no opening balance).
Required:
What represents the cost of sales figure if the actual production was 150 000 units for the
year?
SOLUTION:
Total Cost per unit (R160 + R100 + R40 (VPO) + R3,000,000/ 200’ (R15 – FPO) = R315
Production of 150 000 x Production cost (R315) = R47,250,000
Less: Closing stock at 7500 x R315 = (R2,362,500)
Cost of Sales = R44,887,500
Solution:
Cost per unit R
Raw material 160
Direct labour 100
Variable production overheads 40
Fixed production overheads (3 000 000/200 000) 15
Total cost per unit 315

Cost of inventories sold 44 887 500

Transferred from work in progress (150 000 x R315) 47 250 000
Closing balance (7 500 x R315) (2 362 500)

Fixed production overheads

Incurred 3 000 000
Allocated (150 000 x 15) (2 250 000)
Total FPO – under allocated 750 000

Cost of sales 45 637 500

Cost of inventories – finished goods sold 44 887 500
Fixed production overheads under-allocated 750 000
 LU4 – Practical Example 2
Fixed Production Overheads incurred – R3,000,000
Allocated to production (Normal Capacity) – R15 x 150 000 – R2,250,000 (6.1.2 Conversion C)
Under allocated to production: R3,000,000 – R2,250,000 = R750 000
Cost of Sales = R44,887,500 (Calculated)
Add: Under-allocation = R750 000
Cost of Sales R45,637,500
If the actual production was 250 000 units then there would have been an over allocation:
FPO: Incurred: R3,000,000
Allocated: R3,750,000
Over allocation (R750 000) deduction from Cost of Sales: = R44,887,500 (Calculated)
Less = (R750 000)
Cost of sales: = R44,137,500
 LU4 – Practical Example 1
1) Stock Question
PRACTICAL EXAMPLE: (2. KELEBOGILE – QUESTION)
Purchase of motorcycles:
Kelebogile Ltd, a motorcycle retailer which operates in Johannesburg, ordered 40 new top-of-the-range
motorcycles form China on 1 November 2018.
The motorcycles were received in Durban on 1 January 2019. The invoice price of the motorcycles was
R50 000 each (before a trade discount of 20%) and is payable on 31 December 2019.

The following cash costs regarding the purchase were: R

Freight and insurance 70 000
Customs duty 170 000
Cartage to Johannesburg 100 000
 LU4 – INVENTORY IAS 2
Inyati Ltd

Statement of financial position as at 31 December 20.12

Assets

Current Assets Note R’000

Inventories 3 62 450

Inyati Ltd

Statement of profit or loss and other comprehensive income for the year ended 31 Dec
20.12

Note R’000

Revenue 275 000

Cost of sales (211 150)

Gross Profit 63 850

 LU4 – INVENTORY IAS 2
Inyati Ltd

Notes for the year ended 31 December 20.12

2. Profit before tax:

Profit before tax includes the following item: R’000

Remeasurement of consumables to Net Realizable value (1 600 – 1450) 150

3. Inventories: R’000

Raw materials 15 000

Work in progress 25 500

Finished goods 20 500

Consumables 1 450

62 450
 LU4 – Practical Example 1
Sale of motorcycles:

1. During the year ended 31 December 2019, 50% of the motorcycles were sold on
credit by a salesman at R100,000 each. Sales commission of 5% was paid to the
salesman.

2. On 1 January 2019 two motorcycles were withdrawn from inventory and brought
into use by Kelebogile Ltd in the ordinary course of business. The two motorcycles
are depreciated at 20% per annum on a straight line basis.

Additional information:

Inventory is valued at the lower of cost and net realisable value on a first-in-first out
basis.
 LU4 – Practical Example
REQUIRED:

a) What is the year-end stock value of inventory to be disclosed in the

Statement of Financial Position of Kelebogile Ltd as at 31 December 2019
in accordance with the requirements of International Financial Reporting
Standards (IFRS).
 LU4 – Practical Example
REQUIRED:

a) What is the year-end stock value of inventory to be disclosed in the Statement of Financial Position
of Kelebogile Ltd as at 31 December 2019 in accordance with the requirements of International
Financial Reporting Standards (IFRS).

Calculations:

1. Cost of inventory:

• Purchase price (40 x 50 000 x 80%) 1,600,000 (Cost of purchasing)

• Freight and insurance 70,000

• Customs duty 170,000 Other cost to bring inventory

• Cartage 100,000 to their present location & cond.

• Total 1,940,000 THEORY NB – Cost of Inv

• Cost per unit (1,940,000/40) = 48,500

 LU4 – Practical Example
a) YEAR-END STOCK VALUE TO BE DISCLOSED:

INVENTORY R

(19 x R48 500) 921 500

19 = 2 Motorbikes were withdrawn for own use. The company’s year end is 31
December 2019 and the two motorbikes were withdrawn at 1 January 2019.

(40 – 2) = 38 x 50% = 19
FAC 2601 LECTURERS:
CONTACT DETAILS:
Chris Mkefa: (012) 429 4843 [email protected]
Andre Eysele: (012) 429 4343 [email protected]
Fazana Aboo: (012) 429 4973 [email protected]
Frank Montgomery: (012) 429 4537 [email protected]

OR at [email protected]

PLEASE CONTACT US AT THE ABOVE DETAILS

LU4 – Practical Example 2

THE END