IAS 2, Inventories
Examples
FRK 201
________________________________________________
EXAMPLE 1 – COST OF PURCHASE
The following payments and costs were incurred in respect of inventories during a
month:
● 1 000 units purchased once-off at R20 each
● import duties of R100 paid in total
● shipping costs of R500 incurred
● paid railage costs of R100 from Durban to Pretoria
● paid insurance premium of R100 for goods iro. shipping and railage
● R400 quantity discount received in total for purchasing more than 750 units
● paid supplier within 15 days and received a discount of R300
● 200 units, of the 1 000 already purchased and paid for, were returned as
damaged and credit note received
REQUIRED:
Calculate the cost of inventories for the month.
SUGGESTED SOLUTION – EXAMPLE 1
R
Purchase [1 000 x R20] 20 000
Quantity discount (400)
Settlement discount – Circular 09/06 (300)
Cost of purchase [19 = R19,30 per unit] 19 300
Import duties 100
Shipping costs 500
Railage 100
Insurance – bringing inventories to present location & condition 100
Damaged goods returned [200 x R19,30] (3 860)
Cost of inventories for the month 16 240
Remember: Will never be able to recover import, shipping, railage or insurance
costs – these costs remain part of cost of inventories as they were paid to 3 rd
parties, and not the supplier.
Telephone: (012) 420 6495
Email:
, 2
EXAMPLE 2 – Main products and by-products (IAS 2.14)
Product Y is produced and by-product YY develops during the manufacturing
process. By-product YY can be sold for R3 per unit. Total cost to manufacture
Product Y is R25 per unit and can be sold for R30 per unit. For every one Product Y
manufactured, one by-product YY develops.
Assume that the cost of by-product YY is immaterial.
At the end of the reporting period there are 1 000 Y’s and 100 YY’s on hand.
REQUIRED:
Calculate the carrying amount of inventories on hand at the end of the reporting
period.
SUGGESTED SOLUTION – EXAMPLE 2:
NRV of by-product:
100 YY’s = 100 x R3 NRV = R300
Main product = Total cost x units of main less NRV of by-product
(Y) = R25 x 1 000 units – R300
= R24 700 carrying amount
Total cost of inventory (YY and Y): R24 700 + R300 = R25 000
EXAMPLE 3 –VALUATION OF INVENTORY FOR A MANUFACTURING ENTITY
A company manufactures and sells product X. Purchases of raw materials are made
every Monday morning and amount to 1 600 tons per week. Purchasing cost per ton
of raw material is R150. In addition to this, custom duties of R10 per ton and carriage
of R20 per ton are incurred to transport the materials to the factory.
Further information in respect of product X for the reporting period ended
31 December 20X7:
● normal capacity per week 1 500 tons
● variable production costs R25 per ton
● fixed production costs R30 000 per week
One ton of raw material produces one ton of finished goods.
Finished products are sold for R240 per ton. Sale expenses amount to R3,12 per
ton. Delivery costs amount to R7,50 per ton.
Closing inventory of finished goods at 31 December 20X7 amounts to 2 000 tons.
FRK 201 IAS 2 Handout
, 3
Inventory is valued in accordance with the first-in-first-out method.
REQUIRED:
a) Prepare the accounting policy note for inventories.
b) Calculate the carrying amount of the closing inventory of finished goods at
31 December 20X7 in accordance with IAS 2.
SUGGESTED SOLUTION – EXAMPLE 3
a) Accounting policy - Inventories
Inventories are valued at the lower of cost or net realisable value. Cost is
determined based on the first-in-first-out method.
b) CA of closing inventories
b.1) Manufacturing cost per ton – Product X:
R per ton
Purchase cost paid to supplier 150
Custom duties 10
Carriage 20
Variable production costs 25
Fixed production costs – based on NORMAL capacity
[R30 500] 20
225
b.2) NRV per ton – Product X:
R
Selling price 240,00
Selling expenses (3,12)
Delivery costs (7,50)
NRV 229,38
b.3) Carrying amount of closing inventory (Lower of cost or NRV):
Carrying amount at 31 December 20X7:
2 000 tons closing inventory x R225 cost = R450 000
FRK 201 IAS 2 Handout
Examples
FRK 201
________________________________________________
EXAMPLE 1 – COST OF PURCHASE
The following payments and costs were incurred in respect of inventories during a
month:
● 1 000 units purchased once-off at R20 each
● import duties of R100 paid in total
● shipping costs of R500 incurred
● paid railage costs of R100 from Durban to Pretoria
● paid insurance premium of R100 for goods iro. shipping and railage
● R400 quantity discount received in total for purchasing more than 750 units
● paid supplier within 15 days and received a discount of R300
● 200 units, of the 1 000 already purchased and paid for, were returned as
damaged and credit note received
REQUIRED:
Calculate the cost of inventories for the month.
SUGGESTED SOLUTION – EXAMPLE 1
R
Purchase [1 000 x R20] 20 000
Quantity discount (400)
Settlement discount – Circular 09/06 (300)
Cost of purchase [19 = R19,30 per unit] 19 300
Import duties 100
Shipping costs 500
Railage 100
Insurance – bringing inventories to present location & condition 100
Damaged goods returned [200 x R19,30] (3 860)
Cost of inventories for the month 16 240
Remember: Will never be able to recover import, shipping, railage or insurance
costs – these costs remain part of cost of inventories as they were paid to 3 rd
parties, and not the supplier.
Telephone: (012) 420 6495
Email:
, 2
EXAMPLE 2 – Main products and by-products (IAS 2.14)
Product Y is produced and by-product YY develops during the manufacturing
process. By-product YY can be sold for R3 per unit. Total cost to manufacture
Product Y is R25 per unit and can be sold for R30 per unit. For every one Product Y
manufactured, one by-product YY develops.
Assume that the cost of by-product YY is immaterial.
At the end of the reporting period there are 1 000 Y’s and 100 YY’s on hand.
REQUIRED:
Calculate the carrying amount of inventories on hand at the end of the reporting
period.
SUGGESTED SOLUTION – EXAMPLE 2:
NRV of by-product:
100 YY’s = 100 x R3 NRV = R300
Main product = Total cost x units of main less NRV of by-product
(Y) = R25 x 1 000 units – R300
= R24 700 carrying amount
Total cost of inventory (YY and Y): R24 700 + R300 = R25 000
EXAMPLE 3 –VALUATION OF INVENTORY FOR A MANUFACTURING ENTITY
A company manufactures and sells product X. Purchases of raw materials are made
every Monday morning and amount to 1 600 tons per week. Purchasing cost per ton
of raw material is R150. In addition to this, custom duties of R10 per ton and carriage
of R20 per ton are incurred to transport the materials to the factory.
Further information in respect of product X for the reporting period ended
31 December 20X7:
● normal capacity per week 1 500 tons
● variable production costs R25 per ton
● fixed production costs R30 000 per week
One ton of raw material produces one ton of finished goods.
Finished products are sold for R240 per ton. Sale expenses amount to R3,12 per
ton. Delivery costs amount to R7,50 per ton.
Closing inventory of finished goods at 31 December 20X7 amounts to 2 000 tons.
FRK 201 IAS 2 Handout
, 3
Inventory is valued in accordance with the first-in-first-out method.
REQUIRED:
a) Prepare the accounting policy note for inventories.
b) Calculate the carrying amount of the closing inventory of finished goods at
31 December 20X7 in accordance with IAS 2.
SUGGESTED SOLUTION – EXAMPLE 3
a) Accounting policy - Inventories
Inventories are valued at the lower of cost or net realisable value. Cost is
determined based on the first-in-first-out method.
b) CA of closing inventories
b.1) Manufacturing cost per ton – Product X:
R per ton
Purchase cost paid to supplier 150
Custom duties 10
Carriage 20
Variable production costs 25
Fixed production costs – based on NORMAL capacity
[R30 500] 20
225
b.2) NRV per ton – Product X:
R
Selling price 240,00
Selling expenses (3,12)
Delivery costs (7,50)
NRV 229,38
b.3) Carrying amount of closing inventory (Lower of cost or NRV):
Carrying amount at 31 December 20X7:
2 000 tons closing inventory x R225 cost = R450 000
FRK 201 IAS 2 Handout
