38 / 488
Chapter
4/
Inventories (lAS 2)
29
5.7 Inventories of Service Providers
Inventories of servic e providers are measured at cos ts of their production. These costs consist
primarily of labor and other cos ts of personnel directly used in providin g the service, including cos t
of supervisory personnel , and attributable overheads.
The costs of inventories of service providers
should 1I0t include profit margins or nonattributable overheads that are generally used
ill
prices
quoted by service provi ders
to
their customers.
Case Study 1
Facts
Brilliant Trading Inc. purchases motorcycles from various countries and expo rts them to Europe. Bril–
liant Trading has incurred these expe nses during 2005 :
(a) Cost of purchases (based on vendors' invoices)
(b) Trade discounts on purchases
(c) Import duties
(d) Freight and insurance on purchases
(e) Other handling costs relating to imports
(f)
Salaries of accounting department
(g) Brokerage commi ssion payable to indenting agents for arranging imports
(h) Sales commi ssion payable to sales agents
(i )
After-sales warranty costs
Required
Brilliant Trading Inc. is seeking your advice on which costs are permitted under lAS 2 to be included in
cost of inventory.
Solution
Items (a), (b), (c), (d), (e), and (g) are permitted to be included in cost of inventory under lAS 2. Salaries
of accounting department, sales comm ission, and after-sa les warranty costs are not considered cost of
inventory under lAS 2 and thus are not allowed to be included in cost of inventory.
6. TECHNIQUES OF MEASUREMENT OF COSTS
Tec hniques for measurement of costs such as the standard cos t method and the retail method may
be used if results more or less equal actual cos ts. The standard cos t method takes into acco unt nor–
mal levels of material, labor , efficiency, and capaci ty utilization . The retail method is often used by
entities in the retail industry for which large numbers of inve ntory items have simila r gross profit
margins. The cos t is determined by subtracting the percentage gross margin from the sales value.
The percentage used takes into account inventory that has been marked down to market value (if
market is lower than cost).
7. COST FORMULAS
7.1 In cases of inventories that are not ordinarily interchangeabl e and goods or services produced
and segregated for specific project s, cos ts shall be assigned using the
specific identification
of their
indi vidual costs.
7.2 In all other cases, the cost of invent ories should be measured using
either
• The
FIFO
(first-in, first-out) method; or
• The
weighted-average cost
method.
7.3 The FIFO method assumes that the inventories that are purch ased first are sold first, with the
ending or remaining items in the inventory being valued bas ed on prices of most recent purchases.
However, using the weighted-average cost method, the cost of eac h item is determined from the
weighted-average of the cost of similar items at the beginn ing of a period and the cos t of items pur–
chased or produced during the period.
7,4 Inventories having a similar nature and use to the entity should be valued using the same cost
formula. However, in case of inventories with different nature or use, different cos t formulas may
be j ustified.