1 Cost Of Inventories
The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
2 Costs Of Purchase
The costs of purchase of inventories comprise the:
- Purchase price or list price,
- Import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and
- Transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services.
- Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.
3 Costs Of Conversion
The costs of conversion of inventories include costs directly related to the units of production, such as direct labour.
They also include a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods.
Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as
- Maintenance of factory buildings and equipment;
- And the cost of factory management and administration.
Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as
- Indirect materials;
- Indirect labour.
The allocation of fixed production overheads to the costs of conversion is based on the normal capacity of the production facilities.
Normal capacity is the production expected to be achieved on average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.
The actual level of production may be used if it approximates normal capacity. 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 recognised as an 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.
Variable production overheads are allocated to each unit of production on the basis of the actual use of the production facilities.
3.1 Joint Products
A production process may result in more than one product being produced simultaneously. This is the case, for example, 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, for example, 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 realisable 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.
4 Other Costs
Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be appropriate to include non-production overheads or the costs of designing products for specific customers in the cost of inventories.
Examples of costs excluded from the cost of inventories and recognised as expenses in the period in which they are incurred are:
- Abnormal amounts of wasted materials, labour or other production costs;
- Storage costs, unless those costs are necessary in the production process before a further production stage;
- Administrative overheads that do not contribute to bringing inventories to their present location and condition; and
- Selling costs.