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Inventory – Examples – ACCA Financial Reporting (FR)

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  1. Thank you Chris,

    I have a question…The production overheads is normally a fixed cost irrespective of number of units produced. Now given that 10,000 units were produced during the year instead of 12,000 units, the apportionment of entire production overhead cost should be for 10,000 units (ie $7.2 per unit). I shall appreciate an understanding on same.

    • The amount of fixed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognized as an expense in the period in which they are incurred. In periods of abnormally high production, the amount of fixed overhead allocated to each unit of production is decreased, so that inventories are not measured above cost.

    • @ zainabaali : That 800 is part of 1000 units as told in the question as closing inventory (or inventory at the end of the year). Out of those 1000 units 200 are damaged and 800 are undamaged.

  5. PLEASE HELP-

    in interpreting the question I assume the selling price for the damaged goods was $14 and is now $12- as it says they will now be sold for $12 AFTER the minor repairs of $2 each, meaning has already been accounted for this discount of $2.

    I appreciate some clarification.

    thank you.

  6. Dear sir i have a small confusion . While calculating the cost of damaged units u have taken its nrv. i.e (800 units x 11 = 8800 ) + (200 × 10 = 400)…..i want to know why u have used 10 for the damaged 200 units….in my opinion it might be 13 (11 + 2 additional cost).
    Waiting for ur kind reply.

    Thanks
    Shahid yar
    ACCA 4491058

    • You miss out the point here. This math is about valuing the closing inventory. For those damaged units the selling price is 12. So anyway you can’t valuing them over 12. On the other hand you had to spend extra $2. So tha value you going to get after selling them is $10. That’s why the NRV for damaged goods going to be 10.

  7. HI Chris,
    For the 800 undamaged goods, I understand the principle of taking NRV which is lesser.
    However, if you see historical cost, there is already $11 with overhead and $5 direct cost incurred which is a fact. So, I was expecting to consider $14 ($12+$2) for damaged as the $2 is an extra cost to be incurred for sales to be happened or to be in a usable condition?
    With regards to good stock, it should be anyway at historical average cost which is $ 11.
    Can you please help to understand where I am missing?
    Thanks
    Vijay

  8. But the 800 are not damaged, so therefore can be sold for normal selling price of $12. But as per the lecture, adopting the accounting concept of prudence (lower of cost & NRV) so we use cost @ $11 per unit as it is lower then the NRV of $12.

    The other 200 are damaged and so have to be taken carried @ $10 as this is lower than cost of $11.

    I think that’s right & might make sense! Though it could be a tricky question in an exam.
    I first incorrectly had 800 x 12 = 9600
    Plus, 200 x 10 = 2000 giving 11,600 which was incorrect

  9. Dear sir,
    In my opinion, For 800 unit NRV is10 per unit which is lower than cost. Hence, 800 unit should also be valued at 10 per unit.

    Help me out sir, if i am wrong.

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