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Inventories are assets held for sale in the ordinary course of business, in the process of production for
such file or in the form of materials or supplies to be consumed in the production process or in the
rendering of services

Inventories encompass goods purchased and held for resale for example:
a. Merchandise purchased by a retailer and held for resale
b. Land and other property held for resale by a subdivision entity and real estate developer

Classes of inventories
Inventories are broadly classified into two, namely inventories of a trading concern and inventories of
manufacturing concern

A trading concern is one that buys and sells good in the same form purchased.
A manufacturing concern is one that buys goods which are altered or converted into another form
before they are made available for sale.

The inventories of a manufacturing concern are:

a. Finished goods
b. Goods in process
c. Raw materials
d. Factory or manufacturing supplies

Cost of inventories
The cost of inventories shall comprise:
a. Cost of purchase comprises the purchase price, import duties and irrecoverable taxes, freight,
handling and other costs directly attributable to the acquisition of finished goods, materials and

b. Cost of conversion includes cost directly related to the units of production such as direct labor. It
also includes a systematic allocation of fixed and variable production overhead that is incurred in
converting materials into finished goods.

Fixed production overhead is the indirect cost of production that remains relatively constant regardless
of the volume of production.

Variable production overhead in the indirect cost of production that varies directly with the volume of

c. Other cost incurred in bringing the inventories to their present location and condition

Other cost is included in the cost of inventories only to the extent that it is incurred in bringing the
inventories to their present location and condition.
For example, it may be appropriate to include the cost of designing product for specific customers in the
cost of inventories.

However, the following costs are excluded from the cost of inventories and recognized as expenses in
the period when incurred:

a. Abnormal amounts of waste materials, labor and other production costs.

b. Storage costs, unless necessary in the production process prior to a further production stage.

Thus, storage costs on good in process are capitalized but storage costs on finished goods are capitalized
but storage cost on finished goods are expensed.

c. Administrative overheads
d. Distribution or selling costs

Cost formulas
a. First in, First out
b. Weighted average
- the standard does not permit anymore the use of last in, first out (LIFO) as an alternative formula in
measuring cost of inventories.

Specific identification means that specific costs are attributed to identify items of inventory.

PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated for a
specific project and inventories that are not ordinarily interchangeable.

Measurement of inventory
PAS 2, paragraph 9, provides that inventories shall be measured at the lower of cost and net realizable
The cost of inventory in determined using either FIFO cost or average cost.

The measurement of inventory at the lower of cost and net realizable value is known as LCNRV.

Net realizable value or NRV is the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated cost of disposal

The cost of inventories may not be recoverable under the following circumstances:
a. The inventories are damaged.
b. The inventories have become wholly or partially obsolete
c. The selling prices have declined
d. The estimated cost of completion or the estimated cost disposal has increased

*Inventories are usually written down to net realizable value on an item by item or individual basis.


-Vince Pereda