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Hello Sir i hope youre safe, could you clear to me why;
Allocation isnt part of Statement of Profit or loss? I mean don’t we allocate and absorb OHs and then do the under/over absorbed adjustment? Or is it that is more appropriate to Statement of Financial position because thats where inventory lies?
Kindly clarifyThank you Kahaf – I am keeping well and safe and hope you are too.
Cost of sales = opening inventory + “cost” – closing inventory
For a retail business “cost” would be costs of purchases of finished goods.
For a manufacturing business, “cost” will include, for example:
cost of purchase of raw materials + manufacturing labour cost + production overheads (fixed and variable) etc …In other words, cost of sales includes all the costs associated with inventory, but to the extent that goods have not been sold, these costs are carried forward in the measurement of closing inventory (i.e. in SoFP). The amount of overhead that is included in inventory can be based on a standard cost for financial reporting purposes (i.e. under IAS 2) as long as it is an approximation to actual.
So is it wrong if we say to verify the assertion of allocation of cost of goods sold (i.e an item in SOPL) ?
In the context that You said we can only verify assertion of allocation for SOFP items?The financial statement assertion that is “Accuracy, valuation and allocation” is relevant to account BALANCES (i.e. SoFP items) – see page 84 of the notes. This includes the allocation of expenditure that might otherwise be charged to profit or loss in an asset. Consider for example depreciation of an asset – that would typically be included in SoPL – but, if the asset is factory equipment it is a production overhead. So it is a cost of manufacturing inventory. If the inventory is sold there will be a proportion of depreciation in cost of sales – but to the extent that it is not sold it will be in the asset that is inventory in SoFP.
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