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Inventory Accounting Principles Explained

Inventories are assets held for sale, in production, or to be consumed in production or services. The cost of inventories includes all purchase costs, conversion costs like direct labor, and other costs to bring items to their present condition. Costs excluded are storage unless for production, administrative overhead, and selling/distribution. Inventories are valued at the lower of cost or net realizable value, with cost determined by FIFO or weighted average cost formulas.

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140 views2 pages

Inventory Accounting Principles Explained

Inventories are assets held for sale, in production, or to be consumed in production or services. The cost of inventories includes all purchase costs, conversion costs like direct labor, and other costs to bring items to their present condition. Costs excluded are storage unless for production, administrative overhead, and selling/distribution. Inventories are valued at the lower of cost or net realizable value, with cost determined by FIFO or weighted average cost formulas.

Uploaded by

divyajeevan89
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Inventory Accounting_AS_2 2014

1


Inventories are assets:
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production process or in
the rendering of services








Cost of Inventories
The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
Costs of Purchase
The costs of purchase consist of the purchase price including duties and taxes
(other than those subsequently recoverable by the enterprise from the taxing
authorities), freight inwards and other expenditure directly attributable to the
acquisition. Trade discounts, rebates, duty drawbacks and other similar items
are deducted in determining the costs of purchase.
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.
Unused Raw
material
Unsold Finished
Goods
Work in Progress
Purchase
Issue of material
for production
Sale of Finished
Goods
Opening Stock
Balance sheet
Profit and Loss
Account
Inventory Accounting_AS_2 2014

2


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 overheads other than production
overheads or the costs of designing products for specific customers in the cost of
inventories.
Interest and other borrowing costs are usually considered as not relating to
bringing the inventories to their present location and condition and are,
therefore, usually not included in the cost of inventories.
Exclusions from the Cost of Inventories
storage costs, unless those costs are necessary in the production process prior to a
further production stage;
administrative overheads
selling and distribution costs
Cost Formulas
The cost of inventories, should be assigned by using the first-in, first-out (FIFO), or weighted
average cost formula. The formula used should reflect the fairest possible approximation to the
cost incurred in bringing the items of inventory to their present location and condition.

Measurement of Inventories
Inventories should be valued at the lower of cost and net realizable value.

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