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Regarding Osier question a), management measured inventory using many forecasts and estimates. For overheads, this may be acceptable, if it is allocated base on normal activity level.
But question is why estimate used for direct labour, when actual hours worked and cost can be obtained as the production has already finished. Isnt this against IAS 2? They didnt use direct labour that is directly attributable.
Inventory doesn’t have to be measured “exactly”. IAS 2 takes a practical approach to inventory valuation and so allows formulae (rather than specific cost) for homogenous items and standard cost, retail method, etc. What the scenario is describing is a budgeted standard cost of labour (“forecast annual wages of production staff divided by the annual scheduled hours of production”) which is permitted as long as it is kept sufficiently current to approximate actual. The biggest issue with standard costing (from any perspective) is the treatment of overheads – for FR purposes, production overheads must be included based on a normal level of activity. So this is where the risk of material misstatement is most likely to arise.
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Thank you 🙂
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