You are required to identify with brief reasons at which value the inventory wil

Question

You are required to identify with brief reasons at which value the inventory will be
recognized in each case according to IAS-2?
Part (a) Materials bought at cost of Rs.15, 000 for further processing and assembling in order to
fulfill a profitable special order. It is observed that cost price has fallen to Rs. 12,000 since
buying these items.
Part (b) Company ABC constructed a machine for a customer on a special order on a contract
price of Rs.20, 000. The order has recently been completed by the company at a cost of
Rs.19, 200. It has now been identified that an extra conversion cost of Rs.3, 000 will be required
in order to meet certain regulations. It is duly accepted by both parties that they will meet
equally the extra cost of conversion.

Explanation / Answer

Cost should include all: [IAS 2.10]

1) costs of purchase (including taxes, transport, and handling) net of trade discounts received
2) costs of conversion (including fixed and variable manufacturing overheads) and
3) other costs incurred in bringing the inventories to their present location and condition.

Costs of purchase Rs. 15,000 being the carrying cost of the inventory (assuming it includes applicable taxes such as sales tax etc., cost of transportation and handling).

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