IAS 2 - Inventories, Cost Formulas

Techniques are used for the measurement of inventories such as the standard cost method or the retail method. The choice depends on the method which is most convenient and should be used on a consistent basis. Standard costs are under normal conditions when levels of materials, supplies and labour are used at near constant levels. To this effect they operate at efficient levels of production, however, are still reviewed regularly and may be revised for slight changes.

The retail method is used within the retail industry for measuring large numbers of rapidly changing items with similar margins that are difficult and cumbersome to monitor under other costing methods. The cost of inventory is determined by taking a percentage of sales based on a predetermined margin.

1. Predetermined overhead rate =

                Estimated overhead/Estimated activity base