IAS 2 - Inventory Measurement

Inventories are measured at the the lower of cost or net realisable value. At the very least they include the purchase price plus any amounts paid to import, deliver, handle or acquire the asset before it can be put into production or made available for sale. This includes taxes (net amounts), import duties, and other direct costs, including the acquisition of finished goods, materials and services. Assets need also to be adjusted for recoverable amounts such as tax, rebates, discounts or refunds.

 

Knowing how to measure inventory requires an understanding of cost drivers because inventories can be reworked before they are made available for sale. Conversion costs normally are directly related to units of production. Such costs include direct labour and systematic allocations of fixed and variable costs incurred when converting assets into saleable units.

 

Fixed costs = costs normally allocated on a systematic basis because they are difficult to attribute to specific units of production during the normal course of business operations. They are generally incurred regardless of how many units are produced. Examples include maintenance and rent on buildings, amortization and depreciation which occur automatically.

 

Variable production costs are those which are allocated to each unit of production on the basis of actual use since additional costs are incurred based on volume of production and levels and can be identified.

 

Sometimes it is known that costs are incurred during the production process but it is difficult to separately identify costs that have different cycle throughoutput times. This may be the case where by-products are produced. When this happens, costs are evaluated based on their nature on a rational and consistent basis. For example, costs may be attributed based on relative sales or based on the stage of production.

 

Other costs include expenditures needed to bring the inventories to their present location or condition. (eg. Costs to sell, design, hold, and develop the assets.  Abnormal waste of materials, labour or production efforts may also be included.) Costs to administer the inventory aside from bringing inventory into its present condition and location is under discussion in this IAS.

 

Additional costs incurred due to financing or borowing which increase the firm´s cost of purchasing is part of another IAS (IAS 23 Borrowing Costs).

 

Service providers must also value their inventory if one exists. This would be measured at the cost of production, primarily based on labour and costs attributed to personnel engaged in providing those services with attributable overhead. Unlike inventory in the production process where physical units of product are sold, service providers do not capitalize labour or other costs related to sales and general administrative (G&A) personnel. These costs would be expensed in the period where they have occurred. Neither would service providers include profit margins in their valuation of inventory or factor in prices of non-attributable overhead.