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Regard the cost of inventory , As the company is a manufacturer. Is the cost of inventory should be based on the cost card and on actual cost not the estimated ones for example actual hours worked by labour ?
Or is the management is doing the right thing and just because if the complexity of the computation it could be a misstatement in the inventory ?Thanks
The scenario describes costs based on estimates and forecasts – i.e. not actual. Costs used for management accounting purposes can be used in financial reporting as long as they approximate actual. So at each financial reporting date there needs to be a comparison of actual costs v budgeted/standard and the year end valuation adjusted for the financial statements if necessary (i.e. if materially different). As well as agreeing raw material costs and labour rates particular attention should be given to overheads – must be production overheads only and any abnormal costs must be expensed (not included in inventory) and absorption should be recalculated based on actual hours worked rather than budget, etc.
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