Inventories

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IAS 2 requires that inventories must be valued at the lower of cost and

net realisable value. This requirement is an application of the

accounting concept known as prudence.

Valuation of inventory at cost

Cost includes all costs incurred in bringing the inventories to their present

location and condition. Such costs are likely to include:

 Import duties

 Cost of transportation

 Cost of purchase, production and conversion

Specifically excluded from cost are abnormal wastage (materials, labour

and other production overheads), administrative expenses and selling

expenses. Storage costs are also excluded unless they are incurred within

the production process before a further stage of production can be

completed.

Cost is assigned to each unit of inventory separately and IAS 2 allows the

following methods of measuring the cost of inventories:

 Actual Unit Cost – the actual cost of purchasing or manufacturing

identifiable units of inventory.

 First In First Out (FIFO) – a system which results in the most

recent quantities in hand (work in progress and/or finished goods)

being valued at the latest cost of production or purchase.

 Weighted Average Cost (AVCO) – a valuation calculated by

dividing the total cost of units of finished or partly finished units to

give an average cost for each unit of inventory held.