Putting a value on Inventory

Product vs Period Costs

Sarshi’s Sports Store

Cost of inventory

• Is basically the purchase price of an item

• May include other expenses incurred in buying that particular item of stock. Eg costs been in getting the stock into a condition and location ready for sale

Where do you want the 10 trampolines? That will be $5

delivery cost for each trampoline

Situation 2

??HOW ARE DELIVERY COSTSACCOUNTED FOR?

That will be $5 delivery cost for each trampoline

Product Cost

• It is clear that the $5 is per trampoline

• Where cartage can be identified to individual inventory items, then becomes part of the cost of that inventory item.

• Recorded on stock card

On the fourth day of August.....

The ‘True Sports’ sent to me......

• 30 cricket balls• 20 tennis balls• 15 helmets

And a slippery dip!

Period Cost

Period cost

• Happens when there are many items delivered.

• Not possible to isolate the cartage per inventory item

• Becomes period cost and is therefore written off as an expense

• Period cost = expense in Profit and Loss statement

• Product cost = cost of particular inventory item or stock.

Scenario

“Pete’s Pub Supplies”

1. Ten bar stools $75 plus delivery fee $102. One keg, cost $50 plus delivery fee of $10

Determining the cost

• Is it relevant?• Use the materiality test• Determine whether significant!• Will the omission of the cost affect decision

making• Is it relatively important?

Is cost relevant or material?

• If YES, eg purchase 1 (keg), add it to the cost of inventory

• Enter on the stock card at cost price of $50 + $10

• If NO, treat delivery fee as an expense (cartage inwards in the cost of goods sold)

Materiality

• General rule = 10% cost or more makes cost relevant to inventory.

Lower of cost or net realisable value

• Basic rule = Inventory recorded at cost price

But....may be exceptions!

NRV

• NRV = Net Realisable Value = estimated selling cost less any costs incurred in marketing, selling or distribution of item

• Must be able to trace costs back on individual basis

Bar Stools

• Expected selling price = $25• Pays a commission of $5

• NRV = $20

Principle of Conservatism

• Caution when preparing reports

Conservatism means......

• Recognize losses when they if they are expected to occur

• Recognize revenue when it s actually earned

Balance Day – valuing inventory

• Sometimes stock items may have estimated NRV lower than the cost price. Why?

• Superseded by new model• Obsolete• Out of season or fashion• Damaged• Shop-soiled• Deliberately sold below cost

If inventory sold for < cost

• NRV is used to value inventory• Avoids overstating the Balance Sheet• Cost of inventory and its NRV be stated on

individual product basis (not inventory as a whole)

???

Stock take

Compared with NRV

General Entry required

• NRV = $16000

• Stock Card = $19000

• Reduced value is shown as general journal entry

Make adjustments to stock card!

Remember!

• Is it relevant to individual stock items

• Is it a significant cost?